As the week progressed major indexes where rising to weekly highs and nearing resistances. No other most noticeable resistance is the SPY at 298. It is close to 300 but since Monday where it started at 281 it had reach a high of close to 298 on Wednesday. The likelihood of a retrace is in play and today there was one. SPY went close to 298 before failing and fell toward a session low of 293s but recovered a little to end the day at 294.88. The Nasdaq which has lead the bull market and the current recovery is showing some signs of weakness. The past couple of days it has been weaker than SPY. There maybe a sector rotation from tech to value stocks, but it has yet to play out.
The slow down in price and a slight pullback made sense so today I took a inverse ETF position for a quick scalp. I was playing counter trend, currently bullish, by buying the ETF SPXS which is inverse of SPY. In anticipation for a drop in SPY was the reason I bought the SPXS. In a matter of minutes I closed the trade for a small gain.
The difficulty with trading counter trends is it is difficult to know exactly when this occurs. The way I have cope with timing a counter trend is to trade inverse ETFs in lieu of buying options. The inverse ETFs have their own risks but at the very least price decay is not as bad as options. SPXS is a 3x ETF therefore every 1% move on the SPY is equal to a 3% move on SPXS. The benefit of buying these ETFs is that one can go long or short with leverage.
In investing people can use leverage in multiple ways. Whether it is trading on margin in one's account, or using options, to trading 2x or 3x ETFs. The reason I went in on SPXS was to only scalp for a drop rather than holding the stock long term. It was not even a swing trade since I sold out of it in a matter of minutes. These types of ETFs with a leverage of 2x or 3x should never be held too long. On longer time frame the price decays with these leverage funds even if the direction of the moves in favor of the ETF. Reason for the price decay is the ETFs is the loss will always take more gain to recoup.
$100 XYZ / share and on a particular day the stock crashes 10%. There is a identical ETF 3x inverse of the XYZ stock. Call that ETF ABC. ABC also starts at $100 / share, but because XYZ dropped 10% than ABC would drop 30% leading to $70 / share. The following day the stock rises 10%. By percentage you would think XYZ is back to breakeven, but 10% of $90 is $9 hence the share price is $99 / share. It would take 11.1% gain for a $90 XYZ to get back to $100.
Now stock ABC has it worse since its three times the change in price, the gain of $70 at 30% is only getting the price back to $91. It will actually take a 42.3% gain in order for the share to be back to breakeven at $100. A 42.3% gain does not come often and considering XYZ is a index the price will very unlikely have a +42% day.
Seeing how dangerous it is to hold these inverse ETFs for too long I only used them to scalp trades. There will be times where swing trade, holding these for a few days, is acceptable. Those times is when the trend is following the ETF.
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