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Part 2 - ultra short ETFs at a tipping point?

Last Friday I tossed off a quick post where I mentioned that most of the ProShares ultra short ETFs were exhibiting the same chart pattern and that they seemed to be at a tipping point. More accurately, I pointed out that there were two conflicting patterns emerging and it was difficult to know which would emerge the winner.

When the post appeared in Seeking Alpha, I was taken to task for not providing an analysis of the underlying index. Many of those who commented correctly pointed out that the ultra short ETFs move in reaction to the associated index; thus, it is misleading to attempt to chart the ETFs themselves.

The ETF that was discussed in the previous post was the Ultra Short QQQ (QID). At the time (Friday, 11/14) there was a potential bearish head and shoulders developing. On the other hand, the ETF had also bounced off its 50-day moving average and was then above its 20-day moving average.

Looking at the NASDAQ 100, last Friday it was still hanging onto a support level but still appeared to be trending down. On the other hand, it was also showing a potential double bottom.

Today it looks like the chart patterns were resolved. The NAS dived and QID jumped. Though many money managers have been quoted as saying that we had seen the market lows for the year back in October, looking at the chart of the NASDAQ it was apparent that it was not bouncing back from its recent retests of those lows. The chart of QID, though, showed that jump back above its 20-day MA and it reinforced the idea that the NASDAQ should be approached with caution.

If things play out the way they did in October, we could see maybe a further 4% or 5% downside in the NASDAQ and then a 15% to 20% rally that would take the index back up to its 20-day MA.

And then we get to do the whole thing over again...

Disclosure: long QID
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Anonymous said…
The reasons people are virtualizing are cost, cost savings and then cost avoidance, which is usually seconded by agility and flexibility.

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November 22, 2008 at 2:42:00 AM EST

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