FAZ Calls Are in the Green and Gaining

FAZ (3x leveraged Bear Financials) and with a call position on it as well is a lot of leverage, however it's meant simply as a hedge against long positions that have been in place, if all works out, the hedge makes money, the pullback in financials and the market allows us to add to longs at even better prices and those make even more money.

The question always remains how far, how fast? When Wall Street instigates a pullback, there's a reason for it and no it's not oversold or overbought, they are trying to shake loose some longs or they are trying to get shorts to commit and typically the intensity of the move has to do with what needs to be done to sway emotions far enough to get longs to sell and shorts to commit, this is why moves are often more extreme than they use to be or than you might expect.

In any case, lets take a quick look at FAZ's charts as they are somewhat symbolic of the market with Financials being 1 of the 3 most important S&P groups and arguably in the top two.

 The 3 min chart for FAZ is an intraday chart, it is one of the longer intraday timeframes and as you can see it's had a positive divergence brewing  for 3-4 days. This is why early trade doesn't phase me so long as we have charts that give us a reason to be in the trade.

 A 5 min chart is really about the first or earliest of the intraday timeframes in which we see institutional activity, the 1-3 min charts are usually more along the lines of HFTs, Market Makers and Specialist and sometimes even retail, but that is less and less apparent as retail has largely left the building compared to 10 years ago.

The yellow area represents the head fake move breaking below support, which is something we see over 80% of the time before a reversal, it's one of the last things we see before a reversal and the only way to confirm whether it's a real break or a head fake move (and there are a lot of reasons to run a head fake move or false move from an institutional standpoint) is to see whether there's a 3C divergence contradicting the move and identifying it as a likely head fake move or whether there's confirmation of the move; here we have a positive divergence that contradicts it and puts the probabilities firmly in the corner of a head fake move.

 Now we move to an even longer 10 min chart which is definitely in the realm of institutional action, here we can trace positive divergences sending FAZ higher, negative showing distribution in to a top and a current green arrow which is confirmation of the downtrend, in other words the positive divergence stops at the 5 min chart, which means it's not huge, it's along the lines of a pullback and doesn't endanger the larger bullish trend in financials over the coming weeks.

Understanding these timeframes, the size of the divergences, etc is an art, not a science, but it helps us understand what is likely going on and what tools are best suited to take advantage of the move.