A Quick Glance at the SDS – 2x Short SP500

Jan 9, 2009: 9:42 AM CST

I wanted to show you quickly the structure of the SDS (Ultra-Short S&P 500 ETF) to point out an interesting structure and also see how the price compares to that of the S&P 500.

SDS Daily Chart:

For newer traders, the SDS is a fund that essentially is “Double Short” the S&P 500 and is frequently used in retirement accounts or by traders/funds who are prohibited (or uncomfortable) from shorting stocks.  It can be an alternative to “Going into Cash” but being two-times leveraged, it can indeed be quite risky… or lucrative.

For example, during the S&P sell-off during October, price literally doubled from a September low of $50 to an October high of $110 (which was followed by sharp volatility afterwards).

More recently, price formed a “Cradle Trade” or “Confluence Resistance” Trade as price pulled back to test the convergence area of the 20 and 50 day EMA, forming a doji/evening star candle before falling to fresh 2009 lows.

Looking at this, we would have a rather bearish posture, given that price is in a daily confirmed downtrend and has EMA resistance (at $75) overhead which should be expected to contain price on any rally.

The S&P 500 is actually not quite as ‘bullish’ as the SDS is ‘bearish’ which is interesting (the S&P 500’s moving average structure is still bearish and price – at the time this chart was captured – was actually between the 20 and 50 day EMA, not above both of them).

It’s interesting to note non-confirmations between ETFs and the underlying Index they represent.  Continue studying this ETF along with others (SH is the 1x short S&P 500 ETF) for additional insights.

UPDATE:  A reader passed along this article from Seeking Alpha which describes the intracacies of Short and Leveraged ETFs that is certain worth studying for additional information.  Author Balaji Viswanathan lists 8 specific “Pitfalls” you need to know before trading such ETFs.

In short, the article

Corey Rosenbloom
Afraid to Trade.com

16 Comments

16 Responses to “A Quick Glance at the SDS – 2x Short SP500”

  1. Reggie Perrin Says:

    Doji at 65 a few days ago is a warning sign

  2. Corey Rosenbloom Says:

    We got two dojis back to back just above the 200 day SMA.
    That’s bullish, but everything is so strangely juxtaposed right now that it’s almost more beneficial to wait for a break in the S&P – up off the support or down through the 50 EMA which we’re threatening right now – before taking a position.

    Something big’s about to happen, it’s just unclear which way.

  3. NotAfraidofTrend Says:

    Corey, it is nice to see the SDS chart and see if it confirms, by confirming the opposite of SPX. But some people have complained that SDS does not move up much even though the market goes down. There is some effect of the dividends, especially around the time SDS goes ex-dividend.

    alphatrends is very bullish and is taking a clue from the Mexican market.

    http://alphatrends.blogspot.com/2009/01/stock-market-viceo-trend-analysis-1809.html

    After looking at the action of three days, the market does look a bit oversold.

    But then, I find it very hard to go long in this market and am too scared to go short!

    Corey, I know you are waiting for a big move for the market to show her “true” colors! But, does the market ever do that, except in a very strong trend? And the strong trend on the daily charts is down.

  4. Anon Says:

    Corey,

    when you say bearish, do you mean SDS is bearish and S&P is bullish

    or

    when you say bearish, do you mean S&P is bullish and SDS is bearish?

    Thanks.

  5. Corey Rosenbloom Says:

    Anon,

    It’s sometimes difficult to discuss concepts properly with inverse funds.

    The overhead resistance and structure in SDS strangely looks more “bearish” than the S&P 500 looks “bullish.”

    Bullish for the S&P means higher S&P 500 prices and Bearish for the SDS also means higher S&P 500 prices… and vice versa.

    The idea is that the structure should roughly be the same – they should both equally be bullish/bearish, but in this case, the SDS ‘looks’ more bearish (which is good for the S&P 500).

    We’ll need to see the resolution, but that was the structure at time of screen capture.

  6. toad37 Says:

    Thanks Corey, I use the SDS here and there. I wanted to share a trade I did today… I think the Solar stocks are going to continue to break out.

    Purchased 500 SOLF shares at $5.88 = paid $2,942.50 incl commission
    sold 5 covered Feb 7.50 calls at .30 = received $146.50 after commission
    sold 5 Feb 5 puts at .50= received $246.50 after commission

    If my calculations are correct, I’ve lowered my cost basis to $5.10 on my 500 shares…

    I’ve love to get called at $7.50 in February and on the flip-side I’m ok with getting put 500 shares at $5 as well…

    Just wanted to run this by you guys and share the educational aspect of this as well if it helps any one.

  7. Phoevos Says:

    Corey,

    Is UVU a good buy at this level?

  8. Corey Rosenbloom Says:

    Phoevos,

    Would be indeed from a risk/reward standpoint.

    I’m not necessarily saying we’re definitely headed higher on UVU or SPY or DIA, but that the risk/reward is favorable, especially now. If we break below the 50 day EMA – and I don’t mean by a penny but by 25 cents or more – then odds will shift to favor downside prices but there’s a decent chance (greater than 50% probably) these levels will hold, and if they do, your upside target will be far greater than your downside stop, creating a low-risk, high(ish) probability trade idea.

  9. Corey Rosenbloom Says:

    Toad,

    Looking good in SOLF as long as we hold the daily 20 EMA.

    There’s so much setting up right now with a similar structure that it’s quite amazing. All these markets need to hold their support or we push to new lows in most of them I suspect.

  10. toad37 Says:

    Corey, If we stay above 850 (hopefully above 870)on the SPX, I feel like we will still see 1000 before wave 4 up is over. Just my very humble opinion.

  11. Corey Rosenbloom Says:

    Toad,

    I would agree with that.

    We’re certainly not at a bottom and it would surprise me beyond belief if eventually we don’t take out the November lows, but I do think there’s a great chance for further upside, perhaps even to 1,000. Beyond that would force a reconsideration of opinion.

  12. Trader Mom Says:

    I think it might be hard to take out the Nov bottom. I am basically swing trading the range from Dow 8000-9000.

  13. Corey Rosenbloom Says:

    Trader Mom,

    I’m not saying we’ll break it immediately – there will likely be consolidation, but it looks like we’re due for some sort of expansion move up or down soon – breaking down from here would confirm a “bull trap” which would cause downside pressure quickly due to a large number of stops being taken out which would trigger additional shorting and set up a test of the lows.

    Also, according to either interpretation of Elliott Wave (that we’re in a 4th), we’ll test/break the lows eventually.

  14. Mark Says:

    I have noticed that the charts of many of these 2x inverse ETFs have nearly identical patterns to that of the vix. You commented on how these ETFs are much more bearish than the index they track. Same story with the vix. Much more bearish than the markets are bullish. Not sure what to make out of it, but it doesn’t give me a warm fuzzy when a market can only “chop” higher while these instruments exhibit such bearishness.

  15. Joe Papczun Says:

    Hi Corey!

    I am Joe from Hungary Europe.
    I follow your interesting market interpretation
    occasionally and congratulate on your ideas and great
    work that you presen on this blog.

    Regarding the SDS (And this is also valid for the
    NASDAQ100 Ultra short (QID) the Chart is Not perfect.
    You can see the Big Gap on Dec 23.
    That was because of distribution of funds to the owners
    of these instruments.
    If we eliminate that from the Charts and move all Canle data Up the same percentage value as the size of that Gap and calculate all indexes with teh modified values, than we get a picture, that is more close to the real status / sentiment of the market players.

    QQQQ / SPY did not have this gap (distribution) on the same days in December.

    Have a great and successful 2009 Year!

    Joe

    ps: Actually I lived and worked in the US (Princeton New Jersey)for 6 years and my US stock market enthusiasm dates back from that period.
    in the nineties,

  16. Corey Rosenbloom Says:

    Not Afraid,

    I’ve never referenced the Mexican Market in relation to the S&P – very interesting concept.

    What worries me is the overwhelming bearishness out there among many professionals and other blogs. It’s almost like it’s a certainty that the market will go down next, and I see that too.

    However, because everyone is so bearish, it almost makes me suspect that the market is about to pop strong to the upside, which would seem to be a logical course of action, provided the Elliott interpretations and the “hope” stemming from the Inauguration, etc.

    I wouldn’t swing-trade either way because the market is at a precipice – one nudge and we’re off to the races due to the Price Expansion/Contraction principle (price has spent a good deal of time contracting recently, building steam for a big move).

    Plus it’s a new year and funds are still figuring out what to do.

    For me, I believe the big move will come not from intelligent analysis, but from one side of the market being squeezed like heck and having to bail on their positions, creating momentum which will embolden the other side.

    … we just don’t know who’s going to be squeezed yet.