Let’s Stay In Good Company - December 16, 2011

[Billy]

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Thursday’s buying in IWM was not supported by large players as the 4-day 20DMF RT chart makes most apparent with its negative divergence from IWM’s bounce. Options market makers are trying to lift price closer to maximal pain (73.50) but large players are distributing quietly during the move. We may expect more of the same on this Friday’s quadruple witching options expiration.

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With the 20 DMF now in shorting mode, favorable ST and LT edges settings and a likely gap up above the limit entry price of 71.69, the robot should be able to enter its short position at the open price above the limit. The initial stop will be adjusted 3.54% above actual entry.

It is weird to enter a short trade just before the expected Christmas seasonal bullishness, but as long as large players don’t show confirmation, it’s likely better to stay in their good company. Things should become clearer after opex.

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The clusters didn’t change much after Thursday for GDX and a bounce back to WS3 (54.20) shouldn’t be a surprise. It would relieve the oversold condition and could help the start of another strong wave down. The trailing stop is now just 9 cents above the entry and we don’t risk much anymore waiting for a “cover your short” signal. There is still no edge for entering a new position today.
Billy

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[davidallison@gmail.com]

Billy,

It will be very interesting to see how the latest IWM robot short develops, given this price and money flow divergence. I was looking at the ratio of TNA divided by TZA, over the last three years, shown in this chart.

http://stockcharts.com/h-sc/ui?s=TNA:TZA&p=D&yr=3&mn=0&dy=0&id=p73802389236

At the high point of fear, March 2009 the ratio was TNA/TZA = 0.00523

Today TNA/TZA = 41.74/29.29 = 1.43.

Let us suppose we return to the March 2009 fear level, with a ratio of 0.00523

Solving for TZA
TNA/TZA =0.00523
TZA = 41.74/ 0.00523
TZA = $7973!

I don't believe reset fees have anything to do with the ratio. It gives me the impression, at least for the next few months, there is less risk shorting the bounces, as opposed to buying the dips. The danger might be in taking profits too early from a successful IWM short. Any thoughts on this chart?

Dave

[Billy]

Billy,

It will be very interesting to see how the latest IWM robot short develops, given this price and money flow divergence. I was looking at the ratio of TNA divided by TZA, over the last three years, shown in this chart.

http://stockcharts.com/h-sc/ui?s=TNA:TZA&p=D&yr=3&mn=0&dy=0&id=p73802389236

At the high point of fear, March 2009 the ratio was TNA/TZA = 0.00523

Today TNA/TZA = 41.74/29.29 = 1.43.

Let us suppose we return to the March 2009 fear level, with a ratio of 0.00523

Solving for TZA
TNA/TZA =0.00523
TZA = 41.74/ 0.00523
TZA = $7973!

I don't believe reset fees have anything to do with the ratio. It gives me the impression, at least for the next few months, there is less risk shorting the bounces, as opposed to buying the dips. The danger might be in taking profits too early from a successful IWM short. Any thoughts on this chart?

Dave

Dave
I have no other thoughts that the chart is much distorted by the compounding decay factors on both TNA and TZA. We don’t need to project targets and certainly even less with 3-years triple leverage ratios for a move that could last only a few weeks.
IBD RS rating is 15 for TNA and 13 for TZA. Both were at 14 on Thursday, meaning that 86% of individual stocks do better relatively than both TZA and TNA! IWM RS rating is 57 or doing better than 57% of all stocks and much better than the triple leverage ETFs. This is the end-result of choppiness decaying effect. Only a sustained trend can change that, up or down doesn’t matter. We just need to be in the correct triple leverage instrument at the start of the next big move and don’t need to target anything. The 20DMF is a much more reliable guide.
Billy

[davidallison@gmail.com]

Dave
I have no other thoughts that the chart is much distorted by the compounding decay factors on both TNA and TZA. We don’t need to project targets and certainly even less with 3-years triple leverage ratios for a move that could last only a few weeks.
IBD RS rating is 15 for TNA and 13 for TZA. Both were at 14 on Thursday, meaning that 86% of individual stocks do better relatively than both TZA and TNA! IWM RS rating is 57 or doing better than 57% of all stocks and much better than the triple leverage ETFs. This is the end-result of choppiness decaying effect. Only a sustained trend can change that, up or down doesn’t matter. We just need to be in the correct triple leverage instrument at the start of the next big move and don’t need to target anything. The 20DMF is a much more reliable guide.
Billy

Thanks Billy, I really didn't know what to make of the chart. With two snap shots in time I wasn't sure about the decay effect. Just a thought process really. Wondering in the event of a black swan event and the DOW running down to the March 2009 lows, what would the value of TZA look like.
Dave