Two Financial ETFs to Watch This Week

Monday was a doozy, and one of our very wide-berth limit orders filled in the carnage. In this market, you have to set the price you think is reasonable, then lower that 20% to where you think it's just too cheap to be true, then take another 20% off that and you'll still see the order fill.

To give you an indication of where we are in this market, consider the popular ProShares UltraShort Financials ETF (SKF). Here's its six-month chart [click to enlarge]:


Notice that it's back up at the $200 line, a level it pierced only in November's crescendo crash, but turned back from sharply in January and February. Unfortunately, each of those tops was accompanied by an RSI higher than the current 62. Nonetheless, anybody holding this would be wise to have a trailing stop in place.

That being so, the opposite trade beckons, does it not? SKF's inverse, ProShares Ultra Financials (UYG) should now be nearing oversold conditions at an RSI of 30, and it is: 33.

These are two to watch for the rest of the week.

Comments

[Rocknbob:]

I believe it would also be good to watch SRS this week.

Mar 03 12:19 PM

[Alan Young:]

Doing technical analysis on a derivative doesn't make any sense. It's the underlying index--in this case, XLF--that has to be tracked. The matching peak on the SKF chart is meaningless; it's tracking an index which is still on a steady downtrend.

Of course, it still bears watching--just watch the right chart.

Mar 04 08:45 AM

[AndrewBaker:]

Both of these ETF - SKF and UYG - are 2x leveraged, so every down day means a following up day has to be even better than the index to get you back to where you were on price, as the leverage only works on a one day basis. More than one day and the math is stacked against you when it moves in the wrong direction (and there are plenty of places to see how that works if you don't already know), so whether you're long (UYG) or short (SKF) financials, do not hold them for at most a short period, a few days at best. If you believe your chosen trend is continuing, take profit on a really good day, and buy back in on the reversal; and believe me, you'll nearly always get that chance.

Like your leverage?: then look at FAS and FAZ, 3x on financials!

Mar 04 03:15 PM

[misterchan:]

I have not found the above info to be correct as regards holding various ETFs for up to a month or two. Many articles like this have been written, but the price direction of these vehicles remains intact and certainly does not suffer disintegration after one day or five, six or ten days or more. If price varies, it is only the average up/down swings which are seen in all stocks. The above advice would apply to someone who decided to hang on to an ETF of this type for a longer period of time, perhaps a year or two. They are certainly not candidates for longterm holding, but neither should they be shuffled back and forth every day. Which leads me to wonder whether the above contributor has actually traded these ETFs.

Mar 05 12:59 AM

[mistermike:]

What it boils down to is that there are short periods when the up move is so strong and without pullbacks that it overrules the downward bias for a few days, eg. the last six sessions, and this is true. It is during these periods that you can make money with it buying it long. This is not to say that it doesn't have a downward bias. It does. You can't really argue with mathenatics. The reason it has a downward bias is that it is an inverse. For equal moves in the market, it always goes down more than it goes up, and if the stock moves down a day, it has to work twice as hard to get back to where it was. That's not saying it can't get there, just that it's harder for it to get back up to a previous high after a pullback. If the stock goes up a number of days in a row, like it has the last six days, the negative bias is a moot point. The negative bias on a string of consecutive up days is merely a theoretical concept. It has to have a down day for the negative bias to be reflected in the price, and as soon as there is a down day, it will be reflected. If you asked a mathematician about this, they would tell you the downward bias is true. It's simple math and you can't argue with that, unless you just don't understand the concept.

Mar 06 07:49 PM