TNA Short Signal

Today the signal I've been studying using a GMMA crossover married with 2-Month momentum signaled a short on the TNA. The principle behind this signal is that the GMMA crossover indicates a change in trend while waning momentum indicates weakness in price. One of the primary reasons I'm looking at using a trend filter is that with the exception of day trading 3x ETFs, the best way to play them is directional.  If there is no direction, trying to trade them in a flat market offers poor risk/reward, but if there is a direction these can offer significant returns when managed properly.  Since July 2011 there have been 6 short signals: 07/28/11, 03/06/12, 04/04/12, 07/24/12, 10/10/12 (10/18/12 is ambiguous since there was a GMMA crossover, but no positive momentum shift), and today.  . 

TNA Short Signal

I keep in mind that TNA is a derivative of the Russell so for comparison this index should most likely be the preferred signal for taking a TNA short, or at least used in conjunction. On the Russell the signals came on 07/14 (false signal), 07/27/11, 11/21/11, 12/14/21, 03/05/12, 04/05/12, 07/24/12, 10/9/12, 10/19/12 (ambiguous due to above issue with TNA), and 04/03. There's a difference of 3 signals between using the Russell and TNA, but a noticeable pattern is that the Russell signal coinciding with or followed the next trading session by a TNA confirmation signal has more reliability.

Russell 2000

Also worth looking at quickly is the TZA which produces few signals and those that it does are not particularly effective or long in duration with the exception of the short signals which makes sense due to the internal structure of this leveraged ETF. 

TZA

SLW Short

Two weeks ago I noted in a post that the ETF, SIL, put in a year high volume bar and that many of the components were setting up nicely and worth keeping on the radar. Originally I had a bullish bias, somewhat reinforced by coming across a number of related mentions elsewhere. One of the immediate thoughts I had afterward was that perhaps I was too optimistic in my view and reminded myself about the standard market wisdom of “Beware of the obvious trade.” This trade was clearly becoming too obvious to too many so I started to temper my enthusiasm quickly.

Of the four charts I listed the first ding happened a week later when CDE gapped down.

CDE

Two days later the second chart got dinged as PAAS gapped down as well.

PAAS

This brought to mind two other market concepts of the cockroach effect and the cousin stock theory.. If these two were taking hits than there was a good probability the other two I had listed, SLW and AG, would be next. So yesterday I took another look at the SIL chart and noted the high tail and close near the lows which  increased my conviction that there was a high probability shorting opportunity to the two components that had held up thus far.

SIL

Armed with this information I felt confident that under the current market conditions and with the prior weakness of the CDE and PAAS that if either AG or SLW gave me a short entry signal I would take it today.  Both did trigger but I prioritized by which had confirmed range expansion first and SLW established a wide range seven bar shortly after the first hour of the trading day so I took this trade.

SLW

AG