Go with the Index (Bearish) or Individual Stocks (Bullish)?

A bit of a conundrum.

While I continue to wait for FAS to break out (FOMC meeting just in time...), I don't know which way the market may break. On the major indices like Dow and S&P500, I see a rising wedge pattern with declining volume (=bearish) coupled with negative divergence on MACD. But if I look at individual stocks, I see a reverse head and shoulders pattern (=bullish), FAS being one of them.

Here's a take from Matthew Frailey at Breakpoint Trades (from their free newsletter).

Bull Flag on FAS?

Is it finally breaking out?



(Of course you would have been better off trading JPM or GS for the last month...or even MS.)

FAS - Mind the Gap

What a difference a week makes. Before the Independence Day the world was going to end in ruin. After, all the troubles are gone, at least from the US stock market. Fundamentals be damned, they don't change from week to week! What a bore!

As algo bots busily and dutifully working every microsecond of the day (and night) with the self-sameness, the humans that still inhabit the financial media outlets are doing their best to craft a narrative depending on the market direction of the day (sometimes of the hour), which has little to do with the reality on Main Street.

Since these bots like beta and leverage, IF they are planning to ramp up the market even further (until the Cardinal Climax hits), what better tool to hitch that ride than a triple-long ETF?

Here's a daily 9 month chart of FAS, triple-long financial ETF. The candlestick chart looks like a crap, full of gaps. Who in the sane mind wants to trade this? Or for that matter, any stock in this market?


Since the bots seems to like Fibonacci retracement numbers, I put in two sets of Fibs: one from May high to July low, the other from April high to July low. Today, it passed the 38.2% retracement to May high.

The biggest gaping gap exists between 50% and 61.8% retracement to April high. If this gap is filled, FAS will be about $31. It closed today at $23.57.

Now, is there any hint on the technical indicators that supports this bullish scenario? In fact there is. More than one. First is MACD. Notice the positive divergence developing. The second is ultra-slow stochastics (89), which just crossed above 20. If this stays above 20, it may be a buy signal.

The buy signal may be short-lived, though. J.P.Morgan Chase (JPM) will report its earnings during Thursday premarket, Bank of America (BAC) and Citigroup (C) during Friday premarket. In previous two earnings, JPM was sold hard despite beating the estimates.

If you got FAS, maybe it's safe to sell tomorrow and avoid the heart attack waiting for JPM to report on Thursday morning.

Oh I forgot. Fundamentals don't matter.

Algo bots have their own minds. As I wrote on the chart, if the chart is somehow plotted in 3D with data that is not represented in this 2D chart (data like each individual trade size and price done by the bots), it may become a beautiful Lorenz attractor and it may all make sense.

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.

Leveraged Long ETFs May Not Be What You Think, Either

Danger of leveraged short ETFs has been discussed in this post, but here's more. The focus is on financial LONG ETFs.

XLF is un-leveraged, UYG is double long, FAS is triple long. Looking at their charts, you wouldn't be able to tell that, would you? XLF is almost back to the December level, while UYG is about half that, and FAS is about 1/3.

UYG has more than doubled since March low, and FAS more than tripled while XLF is slightly less than doubled. So if you were able to pick that bottom, good for you, you have bagged the huge gain. On the other hand, if you have been holding XLF since the beginning of the year and didn't sell into the dump in March, you are back to where you started. The same cannot be said for UYG and FAS.

Here's another set of charts, comparing FAS (triple long) and FAZ (triple short). Visually, in the bigger scheme of things, they both seem to be flat-lining. There are enough daily fluctuations for trades, but I'm now more convinced that they are indeed for short-term trades only.

FAS Looks Pretty Good, If You Just Look At It

and don't think about the underlying sector or about the imminent disclosure of bank "stress test" results.

FAS is the ticker symbol for the ETF that tries to replicate 300% of the daily performance of the Russell 1000 Financial Services Index. It is a relatively new ETF (launched last November, in the middle of the crash, as you can see on the chart), but it is increasingly popular particularly since the March low, with the financial sector perceived to have hit the bottom for some time.

I'm in this stock for several weeks, small position, bought in stages. My average is somewhere mid $6. They say double and triple ETF, long or inverse, are just for day trading and not for investment, but I somehow ended up with "investment".

These stocks, double or triple, swings wildly and are decidedly not for the faint of heart. They act more like options, except they don't expire.

I didn't bother to even check the chart when I first bought it in mid March as a partial hedge against FAZ, which is the inverse of FAS (so FAZ is triple short).

Now that FAZ is a miniscule hedge against FAS, I finally bothered to check the chart. And I'm happy with what I see. Too bad the government has to publish the stress test results today (5:00pm EST, I heard).