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With Stock Markets Peaking, It’s An Opportune Time To Short Sell Using ETF Inverse Spreads - Prospering Bear News Blog [entries|archive|friends|userinfo]
Jan Allen

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With Stock Markets Peaking, It’s An Opportune Time To Short Sell Using ETF Inverse Spreads [Oct. 24th, 2006|08:29 pm]
Jan Allen

I.  Summary:
Evidence exists that the stock markets are peaking or have peaked today, Tuesday October 24, 2006 and that this presents the opportune time for short selling.
 
II.  A recent chart of the ETF IWM, which is an investment that seeks investment results of the Russell 2000 index suggests that the Russell 2000, like all of the stock market has peaked and that this represents an opportune time to sell stocks short
Chart of the ETF IWM

III.  Short selling can be done via inverse spreads -- by being long one investment and short another:

 Short the market spread descriptionShort the market spread URLBasis Of Spread
EditDisplayLong DXD and Short DDMbc?s=DXD&t=3m&l=off&z=m&q=l&c=ddmFinancial market
EditDisplayLong MZZ and Short MVVbc?t=3m&s=MZZ&l=off&z=m&q=l&c=mvvFinancial market
EditDisplayLong QID and Short QLDbc?t=6m&s=QID&l=off&z=m&q=l&c=qldFinancial market
EditDisplayLong SDS and Short SSObc?t=3m&s=SDS&l=off&z=m&q=l&c=ssoFinancial market

IV.  The following analysis and chart from stocktiming.com email advisory of 9-19-2006 suggests the S&P 500
can continue to rise only if Volatility remains subdued; this report is very favorable to short selling and suggests the timeliness of taking action.

The VIX (Volatility Index) goes up, and the market goes down.
The VIX goes down, and the market goes up ... that's basically how the VIX works.

Below is an hourly VIX (Volatility Index) chart of what has happened since September relative to the S&P 500.

Note the slope of the S&P's support line and the slope of the VIX's resistance level.  This is exactly how they should be behaving with each other.

Note how perfectly the resistance levels have been hit on the VIX.  There were 4 exact hits on the resistance line.  Each time the VIX hit its resistance, it immediately retreated.

But now, the VIX's resistance line will soon squeeze all the way down to its support line.  As long as the VIX does not break out above the resistance line, it means that its rises will be lower tops than the previous rise. 

And, that means, that as long as the VIX stays within this triangle pattern, that the S&P can continue to rise. 

If the VIX rises above the resistance line, AND the S&P 500 breaks below its support line at the same time, then the market will pull back. 

 



V.  The chart of Long MZZ and Short MVV shows that this spread has been profitable for 5 trading days.
Chart

VI.  Finally, the reports from the following analysts suggest that the stock market is topping out and that this is the opportune time for short selling. 
A.  Richard T. Williams, CFA, CMT in A Chill in the Air writes: "We think the SPX is about to move in concert with oil and rates but in the opposite direction. Since the market has put up such a strong rally for the last couple of months a corrective pullback would be likely in any event so the real test will be the character of the downside. Bulls have run the table for so long that they will complacently give back some ground without a fight, until they realized that something else is happening, 
perhaps 5-10% down from the highs. Only then will they become worried and then fearful, the necessary ingredients for a bottom in stocks. It is for these reasons  that we expect a deep decline in stock prices rather than a shallow corrective pause before a run to new highs."

The ICAP Research 5-year Volume-adjusted Price Chart for S&P500 shows that for a new high on VAP, the momentum is strikingly weak suggesting a failure in the market soon.

(His earlier report concluded: Momentum is so far below VAP compared to prior rallies, that a return to the LT sell signal is likely soon)

B. Dominick writing on 10-15-2006 in Target Reached  relates: I still think that we’re late in the game and I have much more concern for a reversal, rather than worrying about missing the rest of the move, if there is any left. The trend is still up, which might not be the case on Monday 10-16-2006 or Tuesday 10-17-2006, but there is no confirmation of a turn at the moment. 

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