UltraShort ETFs: At a Tipping Point?

by: Trade Radar Operator November 15, 2008 | about stocks: QID    
Trade Radar Operator

Trade Radar Operator

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

So what's going on with the ProShares UltraShort ETFs?

Almost all of them are carving out charts with the same characteristics. I've made some rough (very rough!) notations on the chart of the Ultra Short QQQ ETF (QID) below. There are two interesting formations playing out simultaneously:

  1. A head-and-shoulders is forming. I have pointed out the head and both shoulders in the chart below with the big red sloppy letters S and H and S. This chart formation carries bearish implications for this ETF.
  2. Moving averages tell a different story. It is clear that both the 20-day and 50-day moving averages are well above the 200-day moving average. Recent action shows the ETF staying above its 20-day MA until October 27. At that point it fell below the 20-day and soon bounced off the 50-day MA and closed the week once again above the 20-day MA. I have underlined in blue where QID bounced off the 50-day. This successful test of the 50-day and retaking of the 20-day is potentially bullish.

Chart of QID, 11-14-2008
Conclusion

Two chart formations presaging completely different outcomes.



If QID drops below its 50-day MA, it completes the head-and-shoulders and the assumption is that the ETF could drop another 20 or 25 points.



On the other hand, the latest price action has kept the price of QID above the 20-day MA despite a big down day for the ETF on Thursday. Also implying further gains is MACD where the histogram has just crossed zero in the positive direction. DMI is also looking pretty decent.



As I mentioned above, nearly all of the ultra short ETFs are looking very similar. Further substantial gains in these ETFs, though, would require that stocks finally break below the October lows. Economic reports seem to be conspiring to drive stocks down but investors are hanging in there and keeping the major averages from taking another leg down.



For these ETFs, it seems we are at a turning point. Which way do you think they're going?



Disclosure: Long QID

Related Articles

This article has 41 comments:

  •  
    Nov 15 08:20 AM
    This is why I love TA: as the article says, the market might go up, but there again it might go down.

    And you study how long to make such amazing pronouncements?
    Reply | Link to Comment
  •  
    Nov 15 10:30 AM
    Some of the ProShare UltraShorts seem to have failed dramatically to track its index. Complare charts of XLE, DIG, and DUG, and you will see what I meant.

    DUG seems to have failed miserably to track XLE trends since early October. I saw this pattern in some other Double Shorts ETFs also. What's going on?
    Reply | Link to Comment
  •  
    Nov 15 11:07 AM
    The double shorts do a very poor job of tracking. They do a decent of tracking only in the very short term - week or so. The fund sponsors somehow seem to be able to get away with it.

    However they are somewhat better then single shorts., use them for what they are worth.
    Reply | Link to Comment
  •  
    Nov 15 11:24 AM
    There is at least one triple short now. BGZ
    Reply | Link to Comment
  •  
    Nov 15 12:28 PM
    Hmm, The market may go up. On the other hand, it could go down.

    Wow the wonders of Technical Analysis!
    Reply | Link to Comment
  •  
    Nov 15 12:44 PM
    The Ultra ETFs aren't meant to track a multiple of the index over long periods. The prospectus is clear that it tracks only a multiple of short-term ranges (a policy of replicating the day's price action, but the above comment about it doing reasonably well for periods under a week jives with my experience).

    I'd recommend reading up on the analysis done by other SA posters on the structure of the ETFs - good to know before putting money into them. I still find them valuable for trading.
    Reply | Link to Comment
  •  
    Nov 15 12:56 PM
    Looks exactly like gold was before it fell from 950 to 700. It's gonna drop. Expect a fools rally in the market up to 1200 and then a big drop again. Gotta get that money that went out back in there!!!
    Reply | Link to Comment
  •  
    Nov 15 01:07 PM
    Price target is 101.70 +/- 1.90 by February 20, 2009.
    Reply | Link to Comment
  •  
    Nov 15 02:23 PM
    This is inept analysis, IMO. The author is trying to analyze the chart of a _derivative_ without looking at the underlying index. A moment's glance at the $NDX chart eliminates the ambiguity.
    Reply | Link to Comment
  •  
    Nov 15 02:42 PM
    I saw the face of Jesus in one of the charts. No, wait, that was my potato chip. Never mind.
    Reply | Link to Comment
  •  
    Nov 15 03:00 PM
    There is a MACD divergence in the chart, from roughly Oct 13th until now. This most often tells us which way it's going to break, which is down. However, you have to wait for the 20 day to roll over. This could take awhile. We've also seen a lower high on the chart.
    Reply | Link to Comment
  •  
    Nov 15 03:33 PM
    @ Aalan - I agree you need to look at the underlying index. The drag due to the structure of these ETFs makes it necessary to do TA on the underlying index, not the ETF.

    @Mllambo - be careful about the lower highs. I haven't checked this for QID, but a similar phenomenon appears for SDS, the ultrashort S&P 500 ETF. The debt/equity structure that makes it possible for the ETF to replicate twice the inverse of the Nasdaq over short time periods makes the NAV have a slight bias downward in a sideways market. This means that QID will have a lower close price if the Nasdaq hits 1500 a month from now than its present price, barring a strong deviation from NAV. Reinforces point Aalan makes above - analyze the underlying index.


    On Nov 15 03:00 PM Mllambo wrote:

    > There is a MACD divergence in the chart, from roughly Oct 13th until
    > now. This most often tells us which way it's going to break, which
    > is down. However, you have to wait for the 20 day to roll over.
    > This could take awhile. We've also seen a lower high on the chart.
    Reply | Link to Comment
  •  
    Nov 15 03:54 PM
    RY,
    Agree with you - - - the Ultra ETF's can be traded successfully over the short term - - - the E-Zone System is pretty accurate for this.

    I have had very good results using it on SDS.
    With market volatility where it is, and the VIX so high, these trading oppy's should continue for a while.

    Good fortune to you.


    On Nov 15 12:44 PM R Y wrote:

    > The Ultra ETFs aren't meant to track a multiple of the index over
    > long periods. The prospectus is clear that it tracks only a multiple
    > of short-term ranges (a policy of replicating the day's price action,
    > but the above comment about it doing reasonably well for periods
    > under a week jives with my experience).
    >
    > I'd recommend reading up on the analysis done by other SA posters
    > on the structure of the ETFs - good to know before putting money
    > into them. I still find them valuable for trading.
    Reply | Link to Comment
  •  
    Nov 15 04:33 PM
    I lost my shirt trading on TA...get back to the fundamentals and market psychology to trade successfully. Bought and sold QID on friday for $1K...no chart necessary...just 2 eyes and streaming prices...
    Reply | Link to Comment
  •  
    Nov 15 05:34 PM
    On Nov 15 11:07 AM SB-tiger wrote:

    > The double shorts do a very poor job of tracking. They do a decent
    > of tracking only in the very short term - week or so. The fund sponsors
    > somehow seem to be able to get away with it.

    would you like to know how exactly?
    if so, read the prospectus.

    folks, i'm amazed at 3 things here:
    1) retail investor never reads anything except the infomercial-like material that the sell side is pushing through any avenue they can, including, unfortunately, respected publications and now bloggers as well.
    2) "journalists"... and "bloggers" repeatedly write BS articles trying to give retail investor "new ideas" on what to gamble with so that every new "instrument" find it's sucker.
    YOU ARE BEING INTENTIONALLY MISLED BY THE INDUSTRY! WAKE UP PEOPLE!
    READ, READ, and READ again the prospectus before you buy.
    if there is ANYTHING at all you don't understand DO NOT BUY!

    and to point to an elephant in the room:
    3) when you see a person trying to do TA on anything, especially an ETF that is attempting to track an index - RUN!!! RUN FOR YOUR LIFE!!!
    If your doorbell rang and you asked "who's there" and they said "we are here to tell you how the world works", would you open?
    if so, then by all means, listen to the TA guy trying to explain the same.
    Reply | Link to Comment
  •  
    Nov 15 06:37 PM
    SPY/DIA... leaps Jan/Dec 2010... are these worth investing in for the longterm?
    Reply | Link to Comment
  •  
    Nov 15 07:17 PM
    It makes no sense to do technical analysis on a leveraged ETF that uses options to track an index. The price movement of QID has ZERO relationship to the buying and selling of QID - rather, QID's daily changes are completely determined by the NASDAQ 100 index (QQQ). Technical analysis of QQQ can lead to useful predictions. T.A. of QID will not.
    Reply | Link to Comment
  •  
    Nov 15 11:09 PM
    Stop doing TA on leveraged funds, it reflects poorly on your knowledge of the product.
    Reply | Link to Comment
  •  
    Nov 15 11:51 PM
    Thanks, I am new at all this but I never thought it made sense to do TA on an inverse ETF when it was driven by the 'underlying.' When I trade the DXD I use the DIA for entry and exit points, and I have done OK for a newbie.
    Good trading !


    On Nov 15 11:09 PM ETF Planet wrote:

    > Stop doing TA on leveraged funds, it reflects poorly on your knowledge
    > of the product.
    Reply | Link to Comment
  •  
    Nov 15 11:52 PM
    Thank you ! I am a newbie, but it never made sense to me to do TA on an inverse ( and/or leveraged ) ETF, when it should have a relationship to an 'underlying.' For example, i have done OK trading the DXD, but I use the DIA for all entries and exits. Good luck trading !

    > Stop doing TA on leveraged funds, it reflects poorly on your knowledge
    > of the product.
    Reply | Link to Comment
  •  
    Nov 16 12:29 AM
    I have a feeling U.S.. markets are bottoming out and could benefit from a sudden shift of funds from abroad into U.S. money markets/not bonds when/if the Asian "domino" falls in the financial crisis. So, I'm holding my EEV but dumping domestic shorts. Also, check out the next Direxion 3x funds, they're awesome! =)
    Reply | Link to Comment
  •  
    Nov 16 12:52 AM
    TA on 2x inverse funds is stupid. QID will hit triple digits within the next 45 days.
    Reply | Link to Comment
  •  
    Nov 16 03:55 AM
    There is however one more very large pattern developing that no one has caught; an Acsending Triangle. This is a continuation pattern and should bode well for the bulls (of QID and other ultrashorts). With all the negative news out there and the ineffectiveness of the "rainmakers" concocting more destructive outcomes, it's only a matter of time before the market gives up it's hope and breaks down the October lows.

    In this environment, the market has to feel exhausted where even the last hopefuls have thrown in their hat's. Only then will the market start bringing in fresh blood with cash on hand picking up bargins. I don't see that happening yet.
    Reply | Link to Comment
  •  
    Nov 16 10:04 AM
    Only a Sith lord deals in absolutes.
    Reply | Link to Comment
  •  
    Nov 16 10:49 AM
    You, sir, are the reason why TA gets a bad rap. Many have already pointed out the inadequacy of charting a derivative, and then not to mention, a leveraged one! Wow, double the mistake! You really do like leveraging.

    Now, as to the salvaging the effort, RSI is still heading up. the SHS may actually be a triple top (I haven't checked the underlying index - I don't like nasdaq index), +DI is still above the DI, even though it's just about to cross, all averages, you show, are in their normal form. The only clever sign picked up by Mllambo is the developing negative divergence. I would keep an eye on this baby if I was trading QQQQ/QID.
    Reply | Link to Comment
  •  
    Nov 16 02:21 PM
    I've heard (do your own DD) that shorting the Ultra long ETFs results in truer "tracking" over the longer term, rather than going long the Ultra short ETFs
    Reply | Link to Comment
  •  
    Nov 16 03:00 PM
    Buy equal positions on both sides, in today's markets one will prove to be a winner quickly. Sell the winner and wait. The loser will return to breakeven or go higher, sell, reintroduce the same postions. Use the new Triple Bull/Bear ETFs to ensure a greater correlation to reality on the move.

    After December many LEAPS both put and call will be introduced with 3 year time frames. Those believing in a longer holding periods can pay a fraction of current values to maintain positions in individual stocks they like, or buy insurance, or whatever. Hundreds of stocks will have 1, 2 and 3 year horizons.

    Hell, some individual stocks already trade at option levels. CBS for instance is at multi-decade lows.

    Buffet's Berkshire is down 30% in a few months, net income was down 77%. Is he better than the rest of us or is it because he has more money to toss in and hold onto losing ositions?

    Reply | Link to Comment
  •  
    Nov 16 03:03 PM
    ProShare's UltraShorts are not designed to track double inverse of the underlying on a long-term basis, but only on a day-to-day basis. The difference is huge. If you take a spreadsheet and play with the returns over a period of time, you will find that the advantage of double returns on a daily basis, disappears with the number of reiterations of the up/down cycle.

    If an ultra-short comes close to doubling the inverse of the return of its target index, it has done its job and performed well. That is why I use them for riding trends, but not for long-term tracking of an index ....... because, they won't!


    On Nov 15 10:30 AM HaavBline wrote:

    > Some of the ProShare UltraShorts seem to have failed dramatically
    > to track its index. Complare charts of XLE, DIG, and DUG, and you
    > will see what I meant.
    >
    > DUG seems to have failed miserably to track XLE trends since early
    > October. I saw this pattern in some other Double Shorts ETFs also.
    > What's going on?
    Reply | Link to Comment
  •  
    Nov 16 03:07 PM

    Correction--Sorry.

    "If an ultra-short comes close to doubling the inverse of the return of its target index, it has done its job and performed well."

    SHOULD READ

    If an ultra-short comes close to doubling the inverse of the return of its target index ON ANY GIVEN DAY, it has done its job and performed well ON THAT DAY.

    On Nov 16 03:03 PM RaptorD wrote:

    > ProShare's UltraShorts are not designed to track double inverse of
    > the underlying on a long-term basis, but only on a day-to-day basis.
    > The difference is huge. If you take a spreadsheet and play with the
    > returns over a period of time, you will find that the advantage of
    > double returns on a daily basis, disappears with the number of reiterations
    > of the up/down cycle.
    >
    > If an ultra-short comes close to doubling the inverse of the return
    > of its target index, it has done its job and performed well. That
    > is why I use them for riding trends, but not for long-term tracking
    > of an index ....... because, they won't!
    Reply | Link to Comment
  •  
    Nov 16 04:35 PM
    Technicals say we are in a consolidation range of between 8100 and 9300 on the DOW. (The other two indeces act the same.) Note that this consolidation occurred after a large leg down. Also note that all three major indeces are actually making incrementally lower lows. Taking the downward trend of the consolidation pattern, and remembering the adage 'Until the trend breaks, it will continue in its prior direction', then technically we should plan for a continuation in the prior direction.

    If you are a fundie, then I guess you'd have to say our economy and that of the rest of the world is in a world of hurt, that unemployment, business closures, lack of credit capacity... etc, etc... all point to downward pressure on the market.

    I learned about technicals too late and leaned on the fundamentals. It cost me a lot of money. I can see clearly with technicals where the resistances and supports are, whether a stock is overbought or oversold. Knowing these things earned me $3800 last week. If you view technicals as a 'pawing through chicken entrails at Delphi', then you miss the point.

    jegan ;-)
    Reply | Link to Comment
  •  
    Nov 16 06:09 PM
    go get em jegan, measured moves, if followed, are better than nothing at all. Over +/- only enhance the trade.

    Technicals allow the reader to avoid pitfalls and to leave losing positions quickly. You have a chart, the action should be XYZ. IF it doesn't play out as envisioned, there isn't any emotion involved, get out.

    The "I couldn't be wrong, I'll wait" scenario doesn't apply.
    Reply | Link to Comment
  •  
    Nov 16 06:34 PM
    Sheesh! I am happy to see this post generated so many comments; however, it was merely intended to communicate my musing on the current chart of QID and the fact that TA wasn't providing any predictive capability, even as we all seek a bottom. The post was not intended to be especially profound.

    I agree it is best to examine the underlying indexes before trading the ultra ETFs and I always do. Still, doesn't hurt to look at the ultra ETFs as they kind of exaggerate the moves of the underlying which sometimes help provide further insight.
    Reply | Link to Comment
  •  
    Nov 16 06:40 PM
    Sheesh! I am happy to see this post generated so many comments; however, it was merely intended to communicate my musing on the current chart of QID and the fact that TA wasn't providing any predictive capability, even as we all seek a bottom. The post was not intended to be especially profound.

    I agree it is best to examine the underlying indexes before trading the ultra ETFs and I always do. Still, doesn't hurt to look at the ultra ETFs as they kind of exaggerate the moves of the underlying which sometimes help provide further insight.
    Reply | Link to Comment
  •