Swing Trading Bear ETFs During Market Downturns: Part I

Ken Calhoun |

When the stock market sells off, many traders return to cash, or put their trading capital in non-equities based asset categories (such as real estate, commodities or bonds). Rather than abstain from trading, or engaging in short-selling, one favorite strategy used by active swing traders is to trade the inverse “bear” Exchange Traded Funds (ETFs), to capitalize on market drops.

In this first article, we’ll look at key volatility breakout trading patterns and signals to use when trading these instruments. They trade just as stocks do, and can be traded in virtually all regular trading accounts without special permissions or requirements enabled. They trade in shares just like equities and are the “bear market” equivalents of long ETFs like SPY and QQQ.

Tradable “Bear” (Inverse) Exchange Traded Funds for short-term trades:

Here is a brief list of several inverse ETFs for consideration when short-term swing trading:

Proshares Ultrashort Dow 30 (DXD)

Direxion Daily Energy Bear 3x (ERY)

Direxion Daily Financial Bear 3x (FAZ)

Proshares Ultrashort QQQ (QID)

Proshares Ultrashort S&P 500 (SDS)

Proshares Ultrashort Financials (SKF)

Direxion Daily Small Cap Bear 3x (TZA)

iPath S&P 500 Vix Short-Term Futures (VXX)

The author has traded these instruments extensively, during the 2008 market selloff, and is prepared to do so again in the event the broad market sells down again in the near future. Preparing for potential market selloffs by looking for swing trading long in these short/”bear” inverse ETFs can be an effective trading strategy during the months ahead.

Looking at these on 15-day charts and 90-day daily charts will show the volatility and trend that these instruments have. It is recommended to add a 50, 100 and 200 simple moving average (MA) line to the 90-day chart.

Swing Trading Patterns and Entry Signals:

To best understand the relationship (and trading opportunities) between the bear ETFs and the broad market, it’s helpful to look at a chart that illustrates the differences. In Figure 1 (SDS, Proshares Ultrashort S&P 500) this 3-year chart shows how price action has dropped in SDS during the recent market rally. The inset chart, SPY, shows this long ETF’s price action, in comparison.


The trading strategy used by the author involves waiting for a long pivot in the SDS, for when price recovers above each major moving average line (in this case, to look for potential long trades when the SDS trades above 34, 44 and 66, for longer-term swing trades of several weeks to several months in duration, illustrated by the green arrows).

During the ‘flash crash’ of several years ago, and during the 2008 market selloff, all the above instruments moved up sharply. This provides astute traders with plenty of trading opportunities for when the S&P sells off, since these all go up during market selloffs. If you pull up a multi-year chart for any of the above tickers, you will see just how far these ran up during the 2008 market drop.

Short-Term Swing Trading Trade Setups: 90 Day Candlestick Charts

When looking for shorter-term swing trades (of several days to several weeks in duration), it’s helpful to use a 90-day daily candlestick chart. In Figure 2 (SDS, Proshares Ultrashort S&P 500), this 90-day chart shows recent price action in this instrument.


Although it’s still in a downtrend continuation, the fact that it had recent wide-range positive days on April 4th and 10th, recovering the red 50MA line, indicates potential upcoming strength in the SDS, if it’s able to break over the blue 100MA line (at just under 30).

Looking for swing trade setups involves scanning visually for cup breakouts, volume confirmation, and multi-day uptrend continuation patterns.  It’s also useful to put on small-size (under 100 share) pilot/test trades in several bear ETFs simultaneously during market selloffs, then position-size and scale up when price action continues in the traders’ favor.

In our next article in this series, we’ll look at even shorter-time frame entry signals and professional trading setups to use. Looking for upside moves in these instruments during market pullbacks and selloffs can potentially be a valuable professional swing trading strategy.

Ken Calhoun is a trading professional who has traded millions of dollars of equities since the 1990s, and is the producer of multiple award-winning trading courses and video-based training systems for active traders.  He is a UCLA alumnus and is the founder of SwingScans.com, TradingTheOpen.com and DaytradingUniversity.com, popular online educational sites that reach tens of thousands of active traders worldwide.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


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