My Life My Trade

Stopped Out

Of late, IYR seems to have gone parabolic. We all know how such parabolic moves end. Once the reversal happens, the down move that happens is faster than the parabolic move up. IYR broke out at $35 mark and should head there in a hurry.

I am no longer trying to play this by going long SRS. With the big moves up in bullish leveraged ETFs, I am going to play this and other downside moves by shorting the leveraged bullish ETFs, which in this case is URE.

A move down to $35 region should take SRS to $15 – $15.50, and URE down to $4 region. It is not uncommon for IYR to make moves of 8 to 10% to the downside in a single day. As always, any love shared is appreciated.

IYR has gone crazy. All good things come to an end… so definitely the bad ones do as well. I expect IYR to be below $35 in next week or so. This should bring URE down to $4 or so.

Holding this over the weekend.

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.

IYR has been in a nice downward channel for last 7 – 8 days. This should bode well for SRS holders. However in the near term, IYR is at the bottom of the channel – so, one needs to wait before entering. Top of the channel would converge around 34.00 by end of the day. That would mean SRS down to 18.50 or so. One needs to view this in the broader context of the entire market thought – if the indices start moving lower right at the open, then IYR will likely break out of this channel to the downside. Similarly, if the indices break out strongly to the upside, then IYR might violate this channel to the upside.

This channel is a good guide to entry in the context that markets retrace back some of the losses from Monday’s down day.

UPDATE Jun 16, 2009 3:40PM PT: It turns out that today, IYR, for most part, kept crawling along the lower trendline of the channel – it did have a spike down.. but came back up and closed pretty much around the channel.

There are two things that can happen here

• SPX gaps down and visits 880 – in that case, if you are did not enter IYR short or SRS long, then stay out. The train has already left the station. I am already long SRS with July puts – so I will keep holding on.
• SPX bounces back up to 917 or 923 or even 928 – I will start adding more SRS July calls at 923 and 928.

The currency markets have been used to explain what is going on in the markets lately. The principle that underlies the currency markets and ultimately everything else is supply and demand. Last year in the fall, the indicies plummeted like most of us had never seen before in our lives. We all watched that in amazement, but what happened then has serious implications now. The ease with which indices fell last fall seemed like slicing butter with red hot knife. The thing that most of us forget is that once we have sliced butter with hot knife, pulling the knife out is EVEN MORE easier. What this means is that if indices were to enter that free fall zone of last fall, then we will rip through that region. The move up through that region will be pretty much the way we moved up in mid to late March… in a blink of an the move would be over.

Posted below are the charts that highlight these regions for SPY, IWM, QQQQ, XLF, IYR and OIH highlight some interesting supply and demand regions. For your convenience I have typed up the name of the concerned security in big bold font on each chart.

Also, instead of typing up my conclusions at the bottom of these charts, I am writing it here in case you get fed up of the charts and don’t get to the bottom of the post: IMO, I would even say I strongly believe that the downside is very very limited. The QQQQs will power us up and then IWM and OIH (along with other commodities) will quickly pull SPY through to $100 which will power it to $110 mark… by end of July. That is where we will see any meaningful retracement, possibly down to $92.5 on SPY…

The way I WILL PLAY this is to go long QQQQs now and then move to small caps and commodities. Finally as SPY is nearing $110, depending upon how we move up (supply-demand) will determine which sector is the best to ride the 20 odd percent move down. That IMO will be the B leg of this A-B-C primary {2}.

As always, if you like what you see, please do share some love

QQQQ: We are already in the “NO” resistance region and we should keep powering up with minor retracements. This is what tells me that we keep going up from here.

IWM: We are 3% away from the “NO” resistance region. A decent up day will get us there and the small caps will just power through to $65.

SPY: This one is a bit tricky. The region shaded in yellow tells us why we have been range bound for almost month. Going back to late last year and early this year, there was a LOT of supply in this region. Having broken through 92.5 on SPY, we are now in a region of far less supply. However, whenever we get up to $100 on SPY, we will get to $110 in NO time… may be 4 to 5 days at max.

XLF: This chart best summarizes why FAZ has been going nowhere for a month. Lots of supply from late last year being burnt through. Even if XLF breaks through $13 mark, there is still a lot of supply to contend with. Given this FAS will not be a good play even if we are moving to the upside. There will be a lot of chop chop which will kill a lot of gains in the FAS. Shorting SKF might be a very good idea. The only region of relatively low resistance on XLF is $16.5 to $18.5. But I don’t think we will ever get there.

IYR: Pretty much like XLF – lots of supply all the way up. SRS is going to get murdered through the summer. I had called for $3 by end of year. I am revising that to $3 by late July or August.

OIH: NO resistance all the way up to 145. And we are just bordering that region.

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.