The TZA Direxion Russel 2000 3X Bear ETF the Best Online Trade for October ?

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If you have read a few of my recent posts you know that I have become very cautious on the broad market now and am looking for a downward retracement and profit taking to commence soon.

The weekly MACD is flashing major warning signals and is structured very similar to the first major down leg that occurred in the 1975 time period after their similar ‘automatic rally’ from the bear market lows.

I mentioned in a previous post that the real downside would probably start during the second week of October. 

The daily action in the SP500 today is hinting to me that the downside action may potentially even begin this week instead of waiting two more weeks.  We tried to rally today but then plunged down very hard on the weak consumer confidence numbers.  There is plenty more economic data coming in later this week and tomorrow.  It could be bullish or bearish, but regardless what it is, the market has already spoken to me and it is telling me that it cannot manage big rallies on heavy volume.  On the contrary it is most recently rallying on very light volume and breaking down on heavy volume in the near term.  This is ominous and is reflective of a change in trend in my opinion.

The weekly MACD is setup in a fashion that suggests to me this week could potentially be the ‘trigger week’ that turns the weekly MACD signal line down and moves it into a much stronger position for a bearish crossover.

Based on the tape action I saw today, I am becoming more and more confident that the short side is the best way to play the market for the next month or two.  This does not mean that we can’t get a big rally going, we can.  But if we do get a big rally going tomorrow or any day this week, what I would like to see (to keep my stronger bearish stance) are rallies that start early but fail and sell off into the close.

The mystery to me at this point is what the potential speed of this downside correction will be.  In 1929, after the initial ‘crash’ developed, a rising wedge also formed.  When it was complete, the bottom fell out of the market in pretty quickly and price fell back to the base of the rising wedge which is the typical measured target of rising wedges.

But at that point in time in 1929 the market was in a steep downtrend overall the moving averages were situated in a very bearish stance and the monthly MACD was also very negative.

Now in 2009 we also have a rising wedge but the monthly MACD and moving averages are in a bullish stance.  This tells me that despite the current weekly bearish configuration, there should be more support to the market even if we get the correction I am expecting.

The one fact that makes me think this correction could be more ‘fast and severe’ is that the market has been rising on lower and lower volumes.  That could be a warning sign that when the selling really does start to get a foothold there may not be enough bid under the market which can cause it to drop very fast.

It seems that everyone has forgotten how scary and severe the bear market of 2008 was.  Price was declining in an almost relentless fashion and it was clearly a very fearful time period.  Fear is a stronger emotion than greed, but right now everyone seems to have forgotten the fear part, and just wants to jump into the next biotech stock with no earnings that will gap up 50%.

I was on Stocktwits.com today and happened to stumble upon these guys who are looking for a 22 to 25% decline into October 13th.  Apparently they use fractal analysis and behavioral analysis to time the market.  It seems like an absolutely absurd forecast to think that the market will decline by such a large degree already by October 13th.

I have heard crash predictions many times in the past and most of the time they do not pan out.  It tends to be a statistical improbability in my opinion that such a large decline can occur out of nowhere.  On the other hand you have heard me talk about the significant bearish divergences that I have seen develop in the market, and I can tell you that most ‘crashes’ do occur when you have bearish divergences.  They can happen because price keeps moving higher on momentum only, basically on ‘air’, but then when the music stops and a few big fish decide to jump out of the market everyone panics all at once and price collapses very fast.

I am not predicting a crash!

I am just looking for downside market action.  Perhaps eventually to the point of a 15% correction from the most recent highs.  If we get more than that then it will only benefit the TZA inverse bear ETF that is in the chart at the top of this post.

There are many other inverse Bear ETFs and most of them are suitable to play on a market decline.

The TZA has a pattern that resembles a FALLING wedge instead of a rising wedge which we see in the SP500 and Russell 2000 and other indices.

Contrary to the RISING wedge, the falling wedge can lead to rapid price movement in the UP direction and I expect that to occur in the TZA.  My upside target in the TZA is in the 15 to 20 range.  It may go higher than that, but that will all depend on how fast and how severe the broad market correction gets.

This is a very crucial week and is going to speak volumes about what type of price action we can expect in October.  The bulls have gotten used to minor corrections leading to almost immediate reward and quick recoveries.  If we fail to deliver that trend this week, then it is going to change the character of the market and may set us up for more involved downside in the weeks ahead.

Being heavily long going into October (or even long at all) in my opinion is a huge mistake.  The risk reward favors the short side right now and for the foreseeable future.

Posted in ETFS, Index Trading, SP500
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