First I want to explain why I would close FAS (3x leveraged long Financials) and not open a full FAZ position to replace it (3x leveraged short Financials) or why I would close FAS and enter a partial FAZ position when I think the probabilities are still for a move higher in the market, even if it is just a gap up that is faded immediately.
The market all comes down to probabilities. The reason I want to be out of FAS is this, we are already dealing with what I would consider a short term move ( the pullback to the downside) and we have this noise move (which was expected and talked about even before the move down started). Trading FAS long is trading against the short term probabilities, seeing a change that fast in the market seems to have a reason (Ron Paul's bill passed the House), but it also could be something else, something more serious.
Basically I don't want to take a loss on a position in which I know I'm trading against the probabilities, that loss would be 100% user error, 100% on me.
As for starting a position is FAZ when I think the probabilities are that I can get it at a better price, as I said, I think we know what caused underlying trade in the market to shift so quickly and dramatically, but I don't know for sure, so I want some coverage (without the leverage of options) in a position that is in line with what seems to be the highest probability trade. If the trade moves against me for a few days, it won't be much of a bother so long as the larger probabilities stay on the same side as the trade.
Now for UVXY, which is a leveraged short term volatility ETF (kind of like trading the VIX on steroids for short term trades), just like the VIX, both VXX (non-leveraged) and UVXY (leveraged) trade opposite the market or have an inverse correlation, so when the market goes down (which happens to be the short term trend highest probabilities), these ETFs should move up and thus far we've had good success with timing these trades. So a positive outlook in UVXY is a negative outlook for the market.
The 1 min UVXY intraday chart, other than a negative divergence at the 10:45 highs, 3C stayed in line or confirmation most of the day, until the late afternoon where an uncharacteristic (compared to the rest of the day) positive divergence developed very quickly ending in a leading positive divergence. Something changed and smart money was reacting.
The 2 min chart shows the predominant trend which is a negative divergence and price has responded to that divergence moving down. However, once again today the 2 min chart shows the same fast positive divergence later in the afternoon.
Here's a closer look at the 2 min chart this afternoon, that's 2 leading positive divergences that pretty much came out of nowhere.
All the same things said about the 2 min chart can be said about the 3 min chart
The 3 min chart zoomed in shows a new leading positive divergence for the day as price was near the lows of the day.
The 5 min chart shows the trend as a negative divergence, remember how strong the market averages were earlier today? That is reflected in how weak UVXY's 5 min chart was today as they trade mirror opposite, but that same 5 min chart moved up at the end of the day with the faster charts. Based on how we ended the day, I would think the highest probability is higher prices, I tend to think they will come quick and may not last long, but that's a gut feeling. I think we will see continued negative divergences in the market averages and continued improvement in issues like VXX and UVXY, that should lead us toward the continuation of the (short term) downtrend. Just so there's no confusion, the move up could be considered "short term", but I'm talking about market trends and the move up does not even qualify as a trend, that's why I refer to it as noise.
Now the charts that really have me excited about UVXY and VXX.
The 30 min chart with an incredible leading positive divergence, this makes me want to just buy right now and sit and hold the position, but that' not good tactics, especially when dealing with an options position or any kind of leveraged position. However this tends to confirm in my mind that we will see a nasty downtrend on the short term timeframes and ultimately when the primary trend re-emerges.
The leading positive divergence on the 60 min chart I believe is more suited to the Primary trend, this is quite impressive.
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