foxex: Inverse ETFs

Thursday, October 3, 2019

Inverse ETFs

Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Thursday, October 03, 2019

1. Stock Rebound Means Retest for Inverse ETFs

2. The Stocks That Actually Did Well This Week

3. A Price Pattern That Signals a Potential Trade

Market Moves

The bond market closed higher and gold prices closed today's session moderately higher also. That would be typical behavior when stocks are in retreat, however stocks, surprisingly, rebounded slightly and also closed the day's session higher despite spending the early hours trending lower, and regardless of the moves in bonds and commodities. The day's range and the change since yesterday signaled a bit more volatility than usual for a day only hours away from the nonfarm payroll report (the markets typically hold a tight range in the session before that report is released).

Investors curious about using inverse exchange traded funds (ETFs) to trade this new down-trending market, may be curious how today's trading affected these instruments. It's no surprise that inverse ETFs like the Direxion Daily S&P 500 Bear 3X (SPXS) closed lower today, but it is interesting that while the markets rebounded from breaking a trend line yesterday, the ETFs reversed their breakout and retested support. This brings up an important observation: while inverse ETFs might make for risky trades, they make for terrific chart analysis as shown in the chart below.

The Stocks That Actually Did Well This Week (so far)

Though the S&P 500 (SPX) and stocks in general have fallen this week, some notable companies have actually navigated the week to end in positive territory as of Thursday's close. Software company Iron Mountain (IRM), salon chain Ulta Beauty Inc. (ULTA), Urban Outfitters clothing store (URBN), and homebuilder Lennar Corporation (LEN) all showed strong performance over the past four days. Each has a unique aspect to their story, but it may be worth noting that if markets continue to tank, these stocks might be able to tack into the headwinds.

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A Price Pattern That Signals a Potential Trade

The price action for shares of Urban Outfitters (URBN) have been trending lower for the better part of the year. However, recent months have created a pattern that is worth taking a moment to notice. William O'Neil popularized the cup-and-handle pattern. It is comparatively rare but when it shows up, it could signal a strong reversal of trend, or in some cases a strong continuation of trend. This pattern is in a timely state as of the close on Thursday.

The Bottom Line

U.S. stock indexes rebounded to close above the trendline today after closing below it yesterday. Inverse ETFs mirror the price action of major indexes, and as a consequence when an inverse ETF looks like it is resuming its downward trend, that is a good signal that it might be time to be a buyer of stocks. Though some stocks have been going down, at least a few are still going up. One among them shows a classic cup-and-handle pattern.

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