My Life My Trade

Yesterday, I posted short term and intermediate term outlook on SRS, by analyzing the chart of IYR.

Here is a follow up of that post. In summary, nothing much has changed since then. IYR did not complete the inverse head-and-shoulders pattern. But it did come close to hitting our other target of $32.60 (Today’s high was $32.56).  I expect some more upside in IYR on Friday (Opex Fridays are typically mildly bullish) and pause around $32.60 – $32.80, giving SRS a price of $20.25.

Let me start out by stating, what I mean by Short Term & Intermediate Term. In my dictionary,

• Very Short term = next few hours or at most a day
• Short term = a day or two
• Intermediate term = next few weeks
• Long term = couple of months

SRS is 2x inverse of IYR and as a rule of thumb, any technical analysis SHOULD ALWAYS BE DONE on the stock/index that any leverged/inverse ETF tracks. Accordingly, we are doing a deep dive of IYR here.

Let us first look at the daily chart of IYR: One can see that IYR was rejected at 200dma AND now it has breached through the 10dma, 20dma and 50dma to the downside. This bodes really bad for IYR in intermediate term. Additionally, as it has sold off, the volume has also gone up. However the thing to note is that the stochastics on the daily chart are oversold indicating that a bounce is in the offering.

Let us look at the 10day chart to see where could the bounce take IYR to. For the last 10 days, IYR has been trending in a downward channel. It has also managed to form an inverted head and shoulders pattern in the last two days. There are two possible upside targets for IYR. If it bounces to the top of the channel, then it will reach 32.60 – 32.80 (1.5 to 2% up, meaning SRS goes down 3% to 4% which would be $20.25 or so).

If however, IYR goes on to complete the inverted head and shoulders pattern, then the upside target is $33.40, which is an up move of about 3.5%, meaning SRS goes down by 7%, which would be $19.50. I had done some analysis in the past and IYR was shown to move approximately 2x the daily move of SPX in terms of percentage on most of the days… Thus, a 2% up move in SPX to 930 tomorrow could easily create a 3.5% up move in IYR.

I will be looking for this bounce to enter SRS position for the intermediate term play, which I describe next. Here is the weekly chart of IYR which shows how ominous the things look for the commercial real estate bulls. The weekly stochastic is showing a sell signal, which means on an intermediate term… IYR is ready to move lower. Now, be cautious because there was a similar signal few weeks ago that did not materialize.

Let us now go back to IYR daily chart to see the downside targets for this intermediate term move, should it materialize. I see two support levels at $30 and $27.5 respectively, which should take SRS to $24 and $27 respectively. Beyond that, it would be futile, stupid AND VERY ARROGANT to forecast. If you liked / got anything out of this, please share some love folks.

There seems to be some lack of understanding about decay in the leveraged/inverse ETFs that happens because of chop up and chop down. SRS, known as widow-maker not without a reason is my example of choice to illustrate this point. Today (May 22, 2009), IYR closed at $31.71. In past 6 months, I have identified three other data points for IYR when IYR was near or about $31.71:

• Point1: Nov 11, 2008 – IYR’s low of the day
• Point 2: Dec 11, 2008 – IYR’s close
• Point 3: Feb 3, 2009  IYR’s open
• Point 4: May 22, 2009 – IYR close

These points have been shaded yellow in the IYR chart. The SRS chart shows the value of SRS at these 4 points.

• Point 1: $151.20
• Point 2: $88.43
• Point 3: $57.72
• Point 4: $22.73

You can see that even though from Nov 11, 2008 to May 22, 2009, the underlying IYR has been unchanged (disregarding the moves up and down in this period)… SRS has gone from $151.20 to $22.73 – OUCH OUCH.. So, here’s the message – DO NOT HOLD leveraged ETFs for long period. If they go against you, GET THE HELL OUT.