Trading Inverse ETFs

Ken Calhoun |

For traders looking for signs of when the markets are likely to pullback or sell off, one important clue can be found in inverse (or “bear”) exchange-traded funds (ETFs), which go up when markets drop. Current charts indicate recent high volume spikes in these instruments, which may provide a leading indicator for market sentiment; specifically that markets are currently poised to drop significantly.

Warning Sign #1: One-Year Recent High Volume in UVXY

Clues as to what institutional traders are doing can be found when significant patterns in volume and price occur.  For example in Figure 1 – ProShares Ultra VIX Short-Term Futures ETF (UVXY) , this one-year chart reveals one-year high buying volume in this inverse ETF. Similar patterns are now trending in other inverse ETFs, indicating selling pressure is underway.

Figure1_UVXY.gif

Significant buying volume was seen in late June 2015, as observed in Figure 1. This means that professional traders have been accumulating shares in UVXY and other “bear” ETFs recently. The author has also been buying shares in these instruments, in anticipation of continued buying pressure moving forward during summer and fall of this year.

Yet another technical price-action clue is seen in price pivoting above the 50-period simple moving average (SMA) line for UVXY, for the first time since December 2014. This price bounce is also a long technical signal for this instrument.

Warning Sign #2: 90-Day High Volume & Price Action in SDS

Another confirming technical indicator, a “warning sign” of possible market selling coming up soon, is the recent move up seen in Figure 2 – ProShares UltraShort S&P 500 ETF (SDS) . The high buying volume in this seen in late June, combined with a tall ‘wide range’ green candle that moved above the 100 simple moving average (SMA) indicates significant buying as well.

Figure2_SDS.gif

A confirming technical signal for both of these key inverse ETFs is if they now move above the 200 simple moving average (SMA) line.  If a “golden cross” then occurs, in which the 50 SMA crosses above the 200 SMA, then a strong market correction and/or reversal will be well underway.

Good professional traders don’t predict; instead we react to solid, specific data evidence seen in our charts. So rather than predict an upcoming market selloff, the author will instead caution the trading community that “cracks in the foundation” of the markets are now observed, and to carefully watch to see if these instruments do continue upwards. 

The astute trader will also look for additional confirming indicators (specifically, weakness in small-caps/Russell index instruments) and sector-specific weakness (in banking, finance and biotechs/pharmaceutical) should be used moving forward, to confirm market selling pressure.

Recommended resource: For more on using this and other trading strategies, see the author’s complimentary Saturday “Trading Week Ahead’ webinar events at TradeMastery.com/free.

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 founder of TradeMastery.com and StockTradingSuccess.com (with Steve Nison), 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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