During Market Volatility, Don't Overleverage On the Short Side

(click to enlarge) These swings are crazy and it can be tempting to ignore the long trade here and throw on a bunch of shorts, but be careful to not over-leverage on the short side. Momentum indicators like the RSI, MACD and STO are all showing negative divergences right now when comparing them to the VIX. Meaning as the VIX climbs higher, demonstrating extreme volatility, the indicators aren’t confirming this strength as they are declining. In all of the cases above this isn’t the first wave down as they have peaked, move lower, posted a lower high, and declined again. I opened small positions in the iShares Russell 2000 Index (IWM), DIAMONDS Trust, Series 1 (DIA), and the NASDAQ 100 (QQQQ) on Wednesday and they were down yeserday,  but my losses are quite small. I’m telling you this because despite my optimism about a short term rally, I’m very aware that we could easily drop another 1000 points, so for now I’m not going to add, but just sit tight on them and give them a chance to breathe.

Comments

[lytle:]

Jeff, it was a short but very knowledgeable and interesting article. Thanks.

Don

2008 Oct 25 03:18 PM