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Trade Flash: Short S&P 500, Short Crude Oil, Long the VIX

|Includes: DTO, SDS, SPY, SPY, USO, iPath S&P 500 VIX Short-Term Futures ETN (VXX), VXZ
There are several positions we had been waiting for and on Friday the limits were hit and trades were placed. We are exceedingly confident about these three trades, and we feel that it's worth our readers' time to take a peak at where we're putting our cash. This "trade flash" will target those three trades.

Trade: Long the VIX

Time Horizon: 5-10 Trading Sessions

We went long the VIX (CBOE Volatility Index) on Friday ahead of the Memorial Day weekend. Using a short term VIX tracking ETN from iPath, VXX, we bought shares at $28.50/shr and capitalized on a large pullback from the highs 3-5 sessions earlier.


VXX (iPath S&P 500 VIX Short-Term Futures ETN), 1-yr chart on 05-28-10


Trade: Short the S&P 500

Time Horizon: 5-20 Trading Sessions

For the first time in a LONG time it's becoming safe to bring on short positions relative to the S&P 500 equity index. The S&P 500 p/e ratio adjusted for inflation remains above 20 @ 21.13 as of Friday's S&P 500 close @ 1089, which suggests that the recent correction on the S&P has further to decline before it reaches fair value.


SDS (ProShares Ultra-Short ETF), 6-mo Chart on 05-28-10


While we don't feel comfortable going long the S&P 500 at any p/e level above 15, given the trend of rising interest rates, we understand that risk takers will re-enter the market at higher current p/e valuations. So we're recommending this play as a short term position (i.e. 1-4 weeks or until reaching our profit target). Using the ProShares Ultra Short S&P 500 ETF (NYSEARCA:SDS) we can get relatively liquid 2x inverse exposure to the S&P 500 (recently +50 million shares/day). While we're looking to capitalize on instability and unresolved risks in the EU, trading the SDS will give traders short exposure to a basket of U.S. equities and avoid short term fluctuations  in similar vehicles tied directly to the EU.

Trade: Short Crude Oil

Time Horizon: 5-15 Trading Sessions

We made a call to short Crude at $79.69, calling a price target of $70 /brl for the WTI continuous spot price and we cashed out when the WTI price hit that level. After closing that position at a profit, our hunch was confirmed. The uptrend in inventories had fought the rumors of accelerating demand for gasoline and mediocre distillate consumption, and instead that macro-economic and geopolitical forces are now leading prices.


WTI Continuous Crude Spot, 1-Yr Chart on 05-28-10


You may notice that the MACD histogram would disagree with our position, however the flight from risk trade is back on and we are going against our technical instincts to put an opening stake into DTO at 75 bucks. We also have a buy trigger set at $80/shr which will give us short exposure when the WTI near month contract prices near the 50 day sma at $77.

The European Confidence report and the Chinese Industrial Purchase Managers survey have added to uninspiring anecdotes concerning bond market weakness in the U.S., Europe, and China, to reassure us of our bearish positions here.

Some readers will like none of these strategies, while others will find them all interesting at these levels. Remember to do your own research and by all means tell us why we are RIGHT or WRONG in the comment box below! 

Disclosure: Disclosure: Long SDS, Long DTO, Long VXX