With the market sell-off and retest of the February lows, what does the chart of the SDS – the ProShares 2x short S&P 500 – chart look like?

Let’s take a look to see what lurks beneath the surface.

SDS Weekly:

The weekly chart actually takes us back to the “Crash” of 2009.

Just kidding – remember the SDS is the DOUBLE short (inverse) S&P 500, so moves – especially as the S&P 500 rallies sharply – are exaggerated.

The move off the March 2009 low resulted in a one-week move down 30% from $115 to $80 at the same time the S&P 500 moved up 13% from 670 to 760.  That is a whole different story than the present.

Like the S&P 500 had a lengthy  negative momentum divergence from May 2006 to the peak in April 2010, the SDS formed a massive positive divergence during the same period.

Volume surged to new 2010 highs – actually to levels not seen since October 2008 – during the 2010 sell-off phase.

With the weekly chart in mind, let’s drop down to the daily frame.

SDS Daily:

We see a similar short-term positive divergence from March to May 2010 as we saw with a negative divergence in the S&P 500.  It’s always good to cross-check inverse charts for similar structures.

One thing you might notice – or at least should notice – (and know for a fact if you trade SDS actively) is that SDS did not rise to a new high when the S&P 500 retested (actually fell under) its February low.

The February low in the S&P 500 was 1,044 and the May low was 1,040.

The SDS February high was $39.40 while the May high peaked at $37.80.

Keep this in mind – performance of a leveraged ETF is not always exactly the same as the underlying index – that’s why you should track both the ETF and index closely and read the prospectus very carefully.

That said, we see a negative divergence, or at least a drop-off in daily volume from the recent ‘crash’ situation in May.  That could be interpreted as bullish… or at least “less bearish” for now.

Double and triple leveraged funds may be great for day-traders and short-term swing traders, but do be careful when trading these vehicles and know the risks and rewards of these unique funds.

Corey Rosenbloom, CMT
Afraid to Trade.com

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