Leveraged ETFs: SPXU

One of the things I've noticed over the years is the phenomena of leveraged ETFs (inverse or otherwise) giving cleaner, earlier signals than the averages. In a way I think it would be fair to say that I use them as leading indicators to an extent. I can only guess at why this may be and my guess would be that the extra leverage means that more timely action has to be taken with them and I suspect there may be less manipulation in their underlying trade. For example small divergences to ramp the market in the averages, say near the close. The leveraged ETF will follow the underlying asset/average's lead as that's what they are designed to do (most on a 1-day basis, so be aware of that), however the actual underlying trade in these leveraged products I believe has more to do with actual risk on/risk off dynamics.

Their price has to follow the underlying asset/market average or industry group, but their actual demand can and often does diverge. 3C is measuring the buying and selling in an asset, these ETFs are obliged to follow the underlying, but that doesn't mean it's because of actual demand.

While the ETF's will follow price, they don't set price for a close , say for instance the run we just saw in the NASDAQ over the past couple of weeks. Numerous days there were late day ramps to get the NDX green so its unbroken win streak would remain unbroken, even if the gain was less than a 10th of a percent, but leveraged ETFs don't have that responsibility they just need to mimic the price performance. However the underlying 3C signals of risk on/risk off in these assets can and often will contradict the averages themselves. While someone out there has need for a green close, it doesn't mean traders with deep pockets are willing to chase that move, especially with the leveraged ETFs as they would have more to lose if that move turned sideways on them.

The simple point being, I have found that leveraged ETFs are often an earlier, clearer picture of true risk appetite.

I posted a bit about this last week as I have been following them, Leveraged ETFs / FAZ

This is SPXU, the 3x leveraged Inverse ETF for the SPX, it moves opposite the S&P-500 with 3x leverage. The long 3x leveraged version is UPRO, I'll often compare the underlying against the 2 and 3x long and inverse ETFs and see if there's confirmation or a similar trend among them. To that end as I go through my watchlist today, you already know I like FAZ, SPXU is also getting very interesting here and I'll be covering others as well.

I'm going to post multiple assets (SPY, UPRO (3x long SPY) & SPXU (3x short SPY) and in multiple timeframes. I'm not posting every chart for every timeframe otherwise we end up with nearly 20 charts, but I think it's more than enough for you to get the idea and why I am starting to like SPXU long more and more.

I'm not going to comment on every chart, I think the divergences and confirmation are pretty easy to spot and if they are not, this is an excellent opportunity to get use to seeing divergences as they are the most effective use of just about any indicator you can imagine, whether MACD, RSI,Stochastics, etc.

Also, remember UPRO is the 3x long, SPXU is the 3x short.

 UPRO 60 min with the 4 stages of a trend/cycle with stage 1 base which we have clearly established ran from 1/29 through 2/2, this is accumulation. Stage 2 is mark up and generally doesn't see too much distribution until prices are closer to their target zone which can roughly be surmised by the size and intensity of the stage 1 base's size and its divergences size. Although in a scenario in which you want to primarily distribute in to higher prices, you aren't going to take on a lot of extra inventory that would just need to be sold as well, you're generally going to take on enough to get the move on its way until a short squeeze and retail demand take over, then you're going to be selling in to that and short selling is also selling as it comes across the tape.

Stage 3 is the top area, after that there's only stage 4 which is decline. These cycles play out over and over again and on just about every timeframe from intraday to a multi-year primary market. If you know where you are in the cycle, you have a pretty good idea where you are heading.

 SPXU 60 min is the inverse so at the 1/29-2/2 market base, it is at a stage 3 top and moving to stage 4 decline and now back to stage 1 base as the cycle starts all over again. I think the divergences on both charts make this clear and confirm each other. Remember that 3C is largely based on volume so the price action being inverse or nearly identical doesn't account for the divergence, it plays a role, but it can and will contradict a similar asset, but what we are looking for is confirmation.

 SPY 30 min and the 3 stages so far.

UPRO 30 min looking similar, maybe a bit deeper leading negative divergence.

SPXU 30 min

UPRO 10 min

SPXU 10 min

UPRO 5 min leading deeply negative in the4 area I'd consider the "Chimney or head fake"

SPXU 5 min leading positive in a big way. These are the kinds of divergences I don't ignore, there's no searching the chart, they jump out at you and that's where the greatest edge is with the use of the indicator. The simple truth is not every moment of a trend is engaged in institutional buying and selling in size, so it's the areas where the indicator pops off the chart we are interested in.

 SPY 2 min

UPRO 2 min

SPXU 2 min.

Now you can see why I am liking SPXU more and more, not only from a cycle standpoint and price's confirmation in the way it acts confirming the cycle, but the indicator's signals also confirming the cycle. SPXU looks to be forming a strong base for a move higher , being it's the inverse of SPY/UPRO and their divergences confirm, they'd be expected to make a similarly strong move to the downside.

I'll have more assets for you...