timetodrive (< 20)

My strategy for playing the downturn.

June 10, 2009 – Comments (4) | RELATED TICKERS: FAZ , BGZ , SRS

I left this as a comment on GoodVibe4Ever's post "Each one teach one" and decided to go ahead and leave it as my own blog post as well.  Hope this adds some value to the thinking of others in the CAPS community.

Here is my pitch for trading the coming pullback in the market.  I see a combination of things that are pointing toward a correction happening soon (as in this week or next). 

Partially, this call comes from my belief that the current rally was manufactured.  There are no real signs this recession has made a significant turn toward recovery.  Yes, the economy’s slide has slowed down, and is even showing signs of a bottom, but it has not proven that we have returned to a growth period.  In other words this rally has been manufactured on hopes more than facts. 

The 3 main reasons I think it will happen soon are this: 

1.)    The S&P, DOW and Nasdaq indices are all showing patterns that indicate a top.  It looks like there may be a push of this final wave,  but I think it will be weak.  I am still learning EWT and will reserve trying to label wave counts.

2.)    VIX index is looking like it is reaching a bottom, lots of zigzagging and feels to me like it is too low for the real volatility that is happening on an intraday level.

3.)    We are going into the 13th week without a significant pull-back, so whether this is a correction in a larger bear market or a first wave in a new bull market (doubtful IMO) we are due for a downturn.

I have chosen to take the ultra bear ETF vehicle to ride this downturn.  My top choice is FAZ, because I think financials have gone too far too fast and will be the first to fall just like they were the first to reverse from their lows, plus the RIFIN chart is looking really weak.   I also chose BGZ and SRS as I think real estate and large caps will fall with major indices.  There are others I am watching as well, but haven't purchased.

I have been purchasing shares of these 3 ETFs and will continue to add to them and then go in more heavily once we get a confirmed break on major indices.  I know the decay on these make them bad for long-term holdings, but I am currently not day trading and am riding waves in the several weeks to couple of months trend.   When the market begins trending downward, compounding will reverse any losses from decay. 

This is my current play.  I have a lot of longs that I will be looking at once we reach a level of support and start to go back up again.  I am watching UNG also as a possible buy in the near term. 

So, there we have it, my pitch.  Time will tell.  I am putting myself out there and welcome any critique or comments.