Goodbye VIX, and Death of Inverse ETFs?

Seems like it, though never say never. As VIX heads towards sub-10, it is killing the inverse ETFs like SKF. The point and figure chart of VIX has 7 as the target.

The chart below plots VIX and SKF.


VIX is about to break down from a double bottom. If this breaks, hello 7. The last time VIX dipped below 10 was in November 2006 - February 2007.

Will SKF Break Out?

With President Obama's war (fight, bickering, posturing, whatever you call it) against nation's big banks on several fronts, the U.S. stock market swooned last week. This week, both Monday and Tuesday saw the market try to shake off last week's big sell-offs and go up, only to get deflated back under a mountain of uncertainty about the future government actions.

Not surprisingly, the sector that has led the downward movement is financials. If this is a definite trend change, whatever the cause or trigger is, I'd better take a look at SKF (double-short financial ETF) again quickly so I don't miss the entry too badly.

One-year daily chart of SKF doesn't show much movement other than flat-lining. But if you look at a shorter-term daily chart, say 6 months, you see some tradable patterns.


On Tuesday, SKF hit the trend line connecting the tops from August 09 and November 09. Also it hit the upper bollinger band. In the past 6 months that's where the stock turned back down. Also, notice the bottom trend line connecting the October bottom and December bottom. These two trend lines seem to form a symmetrical triangle pattern. SKF broke down from that triangle in early January, and now it is hitting the trend lines from under.

So far, there is no negative divergence. RSI shows positive divergence, albeit slight.

If it were to break back down, it is at least short-term bearish; a short-term target would be to the lower bollinger band. If it were to break upward, this is about the right time and place to do it. If it breaks out, backtests the trend line and holds at the trend line, that will be bullish for this stock, and bearish for the general market.

Another Way To Look At FAZ, FAS, SKF, UYG

in other words, leveraged financials ETFs. These two charts are the area charts, plotting the weekly combined price of SKF (double short financial) and UYG (double long financial) for the top chart, and of FAZ (triple short financial) and FAS (triple long financial).



Even ignoring the spikes, SKF+UYG's current price level is less than 1/2 of December 08 level. FAZ+FAS's current price level is less than 1/3 of December 08 level. So, if you are not a day trader, the winning long-term trade for these leveraged ETFs since December 08 would have been to short ALL.

If it's any comfort, unleveraged financial ETF combo hasn't fared that well either. The weekly combined price of SEF (unleveraged financial) and XLF (unleveraged financial) for the same duration shows a decline of about 25%, mostly due to the decrease in SEF.

Possible Future for SKF

Today it's not a graphical chart, but a spreadsheet I did a while back ago (May 22, actually) and modified some today. I have discussed how leveraged ETFs, long or short, do not perform as you may think (unless you read the fine print), in these posts.

I made this spreadsheet back when there was still a lot of talk of imminent market correction and retesting of March low. BKX is the Philadelphia Bank Index. SKF is Ultrashort Financials ETF (double short), and IYF is unleveraged long financials ETF. For BKX to go from May 22 level to March low of about $17, that's 50% correction. As a double short ETF, SKF should at least go up 100%.

I said "should", because, in real market, the index does not drop 50% in one day. So I created 4 case studies:

• BKX will drop 10% every trading day until it hits March low;
• BKX will drop to March low but go down in a zig zag;
• BKX will drop to March low but not before it goes back up to May high and touches 200-DMA;
• BKX will drop to March low but not before it almost retakes December high.

After observing the market action and BKX since then, I just added one more case, not a very good one for the market bears and SKF bulls:

• BKX will hold at this level, and go up in zig zag, taking out prior levels, all the way up to September-October 08 level.

Case study 1: BKX will drop 10% every trading day until it hits March low:

Case study 2: BKX will drop to March low but go down in a zig zag:

Case study 3: BKX will drop to March low but not before it goes back up to May high and touches 200-DMA:

Case study 4: BKX will drop to March low but not before it almost retakes December high:

Case study 5: BKX will hold at this level, and go up in zig zag, taking out prior levels, all the way up to September-October 08 level:

Last September, SKF was trading above $100.

Today, SKF is trading slightly below $40, with one hour of trading left. IYF is around $44. BKX is at 37.76.

I am totally out of leveraged short ETFs for now. I have a feeling that BKX could run back to December high (around $46). It is tempting to short SKF, or buy puts, with the target price of $25.