BGZ (long) Trade Idea

As I just mentioned in the last post/market update, my scan returned a unusual number of large caps, so we've covered the small caps with TZA, BGZ is a 3x leveraged short ETF on Large Caps. Although I prefer a blend of inverse ETFs (especially when I want to quickly cover a broad sector), I also like to have straight out short positions as there are advantages to a short position that a long inverse ETF can not provide you with. There's also a danger in dealing with highly leveraged ETFs as they are intended to approximate 1 day's gains/losses and because they don't always hit the target exactly combined with the effects of compounding and leverage, they can be dangerous in a choppy market.

 Here's my X-over screen on a 60 min chart giving a long signal on BGZ, from the looks of it, a pullback is a probability and is in fact underway right now. The first two targets for the pullback are in red.

 Here's the daily Stoch/RSI combo indicator that has been testing so well, giving a long signal. One thing for your technical tool box, this chart shows a great example of what traders expect a market to do in the case of a double bottom and what the market actually does as it has transformed over the years, while traders fail to keep pace with Wall Street. In the past, a good double bottom price pattern would see the test (the second bottom) fall just short of the lows of the first bottom; this is meant to be taken as strength.

However, Wall Street quickly adapted to the expectations of technical traders, ever since the advent of the internet and the rise in popularity of technical analysis. Now, more often then not, we see the old ideas turned on their head as we see here the second bottom made a lower low. There are several reasons this happens, 1) in the low volume trading environment we've been in for a couple of years, anything to trigger orders (limits/stops, etc) increases the opportunity to make money on the bid ask spread as volume typically is higher on this kind of breakdown. 2) Firms receive volume rebates, therefore the more volume they can create, the more rebates they get. 3) It shakes out traders and allows Wall Street to pick up shares on the cheap. Wall Street knows that most retail traders will take one shot at a position and if it fails (due to the lack of risk management), the retail trader usually loses money, sours on the trade and forgets about it, again shares are picked up on the cheap. Many books have taught technical traders the following concept, "If your expected trade goes against you, you should turn around and take the opposite side of the trade", this gives Wall Street a chance to knock traders out of the same trade twice, gain on the bid/ask, increased volume and rebates, and gives Wall Street's trade a head start as traders close positions at a loss, it moves the trade in Wall Street's favor.

Just something for your tool box.

 Here's BGZ's 60 min. 3C chart, note the negative divergence occurred on a false breakout (similar to what I just wrote about, but in reverse) and it also shows a nice positive divergence which is leading.

 The 5 min chart shows a negative divergence and a pullback since then.

Here's my Trend Channel and several stops it triggered as well as holding that nice downtrend. The white box is an area for a longer term stop. ADX turned down in January suggesting the trend down was ending, it's nice and low now and set to move up with a new trend (up).