SPY Example

When looking at the SPY, I could add about the last 30-40% of the SPXU long (3x short S&P500).

I'll show you where the deterioration is and where the most probable place to add would be as well as the lowest risk, highest probability area.

 Speaking from a behavioral perspective, the market's highest probability move before a downside reversal from this move up is to break above the recent highs (resistance) at the red trendline. This is the head fake move, we see it at least 80% of the time just before a reversal. There are real reasons why this happens and it has to do with several things, but the most important is opening up demand and higher prices to close out any longs left over and to be able to short (both selling longs and starting a short both come across the tape as sales). The reason most traders like us don''t understand this is they don't understand how you must trade much differently when you are talking about a few hundred shares vs. a few hundred thousand or more. It also creates a self-priming downside momentum situation that snowballs without smart money having to expend any funds or energy because of the bulls trapped at a loss.

So that is the most likely area and also the best entry for us, the lowest risk and highest probabilities. I'd personally try to wait and see if we can get that before filling out the SPXU position, but if I had no exposure on the short side, then I would consider this area to be good enough to start a partial position, maybe 50%, maybe a bit more and that is a contingency in case we have a sudden and unforeseeable break based on fundamental news flow like yesterday's minutes or the way the House voted on the Fiscal cliff, at least you have some exposure in that circumstance.

 The longer term charts are most important in this trade, the 15 min above has many divergences, but the only one I care about now is the current new leading negative low.

 Once we have the longer charts in place we swing back around to the shorter charts and look for migration of the divergence from the shortest (1 min) charts to the longer (2, 3 and 5 min), when we have all those in place, especially after a head fake move (which this entire pop higher the last several days can be considered as a large head fake move) then we are at the highest probabilities.

 The 2 min chart is leading negative, that's all we need there...

The 5 min chart is leading negative, but a new low is what we need there.

So these are the things we are looking for and of course we want to see SPXU show the same strength in positive divergences, this tends to happen fast with leveraged ETFs as no one wants to spend more time in them than they have to so smart money usually makes the transition in to ETFs like SPXU pretty fast. The charts of the SPY will look a lot worse before the charts of SPXU look as good.