2 As I posted on Friday, that day I entered a trade in TZA. For me, it is an important trade, so I am devoting a lot of time to it. It is a good trade for me because, besides being profitable, it is forcing me to refine my charting skills. I could get blown out of this trade at any time, this is one volatile security, but since I’m still in it, I thought some traders some might find an update of use.
Briefly, TZA is a 3x inverse Bearish play on the Russell 2000. The Russell, represented by IWM, has its own peculiarities but overall follows the major trends in the market. By playing TZA, you are shorting IWM, which means you are short the market.
I entered the trade for several reasons. First, I felt the market was overheated last week, with the blow-off rally on Thursday. Too many technical indicators supported this view, such as the number of stocks trading over the 40-day moving averages and so forth. Every indicator for the market that I checked on the daily charts screamed “Overbought.” The Doji on IWM on Friday also was helpful, as I posted then, but that alone wouldn’t have been enough. Second, I just could not bring myself to go and stay long when the market popped on the absolutely ludicrous and quite astonishing developments in Europe that caused the Thursday rally. Third, I discounted all the pumping by CNBC and others about hedge fund managers somehow being able to force the market higher into the end of the year. Hey, they WISH they had that power. And, fourth, TZA itself was trading around where TNA took off in early October, and had been beaten up pretty good. Yes, rallies can and do cause the market to stay overbought for extended periods, but that invariably occurs when the economic news somehow justifies it or some other macro news ignites it. Nothing like that was apparent to me, so why should the market use a sharp, classic V-shaped Bear Market rally to hit all-time highs? Didn’t make sense.
Those were the reasons, whether you agree or not. As a trader, you have to make decisions and take chances. That’s just the way it is.
Enough background. As seemingly everyone knows, the market has been unusually correlated with the Euro/Dollar rate ($EURUSD). Over the weekend, futures were doing their usual wishy-washy dance slightly to the downside, which really means nothing for the week ahead, when suddenly on Sunday night Japan intervened to force down the Yen (and thus support the Dollar). $EURUSD plummeted, the futures around the world followed, and Sunday night in StockTwits felt like a regular trading session, it was so active with people watching and trading ES_F.
So, the market gapped down this morning, TZA gapping about a buck higher. It ran up slightly to the low $30 area, then stalled. People trading this market can vouch that the middle of the day can trade perversely differently than the first and last hours do, and today was no exception. As the morning wore on, the market edged higher, and TZA edged lower.
This was not the action I was looking for. Even at its low, it was above my buy-in price in the mid-28s, but I was bound and determined not to take a loss. So, I had my finger on the trigger for a while, but never did pull it. A little too antsy, perhaps, but three weeks of constant moves higher will do that to you.
I turned to the IWM chart to see what was going on. For some reason, it was going up while everything else was going down.
This was a fine kettle of fish. I checked some of my momentum indicators, and I saw some huge spikes on the tape. Fortunately, they were only a few, and were not followed up. The big-money boys were playing their mind games, but they just didn’t have the firepower left to pull it off. So, despite being right on the edge of my mental stop, I stuck with the trade.
That was fortunate. Here is the remainder of the day for IWM:
I put an arrow to show the critical point. This was the moment of capitulation for the Bulls. IWM put in a double top, and fell for the rest of the day. TZA obviously rose.
Anyway, I’m not showing you my technical indicators because I can’t get some of them to work except during active trading. But, they were vital by showing me the ebbs and flows of volume and momentum on the tape. Also, IWM had an uncanny knack today of trading to its pivot points, resistance and support lines, and then reversing. It didn’t really disregard them until the end of the day, when the market showed its true colors with the late sell-off.
So, I’m still in the trade. No, there was nothing guaranteed about this, but I thought it might be instructive for some to see how it is developing. If we get another sell-off on Tuesday, I may be in this one for a while. I don’t have a goal or target, the market will decide that for me. If the market slide gains steam, though, I wouldn’t be at all surprised to see this thing hit 40. As we go along, a little cushion of profit will help keep me from being so gun-shy and exiting too soon.
Good luck with your trading.
2 Responses to “More Thoughts on the $TZA Trade”
flyaway18
Congrats on your trade, yet kind of a bummer you must attend to this instrument 24-7. You must have bought big on Friday or, do you plan on adding if the market should reverse a bit Tuesday?
Waterlogz
Well.. I to have some TZA…Why.. I bought at 35 bucks because I believed market was over extended. I also averaged down when it hit 28.50. 3-1….. The key is not to put your allotted amount in right away in case you are wrong. Which I was. 5 % of portfolio is all I will use to play in TZA.Especially in xxxs.. Basically Its what I call fun money..There are much better ways to profit in the market though. If I lose I still can sleep at night. No big deal..
I also put 30% of portfollio in the DGB double Gold etf 2 years ago. Why? I had conviction that gold was going to go up…and continue. Its still there. You best have conviction and believe in the trade. Or use an amount you dont care about.
If you have a profit take it…Good post