Friday, December 19, 2008

Utilitiies ETF Bearish Triangle; Dec. 19, 2008

Using options going long the market did not work well with volatility shooting lower and completely eroding my option premium making it very difficult to make any gains regardless of how big the market rallied. So I've decided to get long the S&P with a double long ETF (SSO) and short the market through various ETFs that are showing bearish formations. One of those is the above utilities ETF (XLU).

The above chart is a daily of the XLU and you can see that the trend is clearly down and it drops right into a consolidation that is clearly a triangle. Also notice the MACD below is showing a bearish push down. According to EWP, triangles like this result in a sharp thrust in the direction of the previous trend. The rules are clear as to how far it can rally as well. In short, if the bearish triangle scenario is correct, this ETF should thrust sharply to new lows before it rises above $30.18. It's trading now around $28.95 so I'm risking 4.2% to get to a new low at $23.28 which is at least 19.5%.

That's a risk/reward ratio I'm jumping all over.

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