The short side using QID, DXD, UWM, and SDS

For objective investors the market offers opportunity on both sides of the fence.  Traditional investors tend to only think about the upside spreads achieved by buying the market, but spreads can be equally as attractive on the short side of the fence when the market falls, it's just not something normal investors are wrapping their heads around regularly, but I think they should.

There's really no difference between the market going up and making money from the long side, and it going down and making money from the short side, especially when you are using market based ETFs.  It's just a different symbol!

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In fact, the combination of upside spreads and downside spreads are exactly what define the entire opportunity the market offers.  As of September 10th, for example, the NASDAQ was up 1.3% for the year, but one of our strategies (The Sentiment Table Strategy), a strategy that takes advantage of both sides, was up 62%.  I am not saying that this strategy was perfect, but it took advantage of spreads in both directions, and the difference in return proves that the opportunity is not exclusive to the long side of the market.

When is the right time to short the stock market?

To answer that, let's identify the instruments that are best suited for this.  Our preferences, because of their almost direct correlation to the markets, are the short based ETFs associated with the NASDAQ, S&P 500, and DJIA.  Furthermore, we prefer the 2x short ETFs, and these can be used in IRA accounts so that adds tremendous value as well, but there's more when it comes to IRAs.

We believe all IRA accounts should also have same day settlement and before trading any ETFs like these we recommend to our clients IRAs that have same day settlement so they do not need to wait for three days to come and go before the trades settle.

The short based ETFs we prefer are (market specifically):

  • DJIA - ProShares UltraShort Dow30 (ETF) (NYSEARCA:DXD)
  • S&P 500 - ProShares UltraShort S&P500 (ETF) (NYSEARCA:SDS)
  • Russell 2000 - ProShares Ultra Russell2000 (ETF) (NYSEARCA:UWM)
  • NASDAQ - ProShares UltraShort QQQ (ETF) (NYSEARCA:QID)

When short signals come, we buy short, but when do short signals come?

Short signals come when the market tells us.  I know, the reaction is 'thanks for the insight buddy,' but there is of course more to it.  There are in fact two ways that we identify these opportunities. 

Identifying short side opportunities:

  • Use a combined multi-tiered technical analysis that incorporates all markets
  • Use/Create a Sentiment Table that identifies overbought and oversold conditions.

The multi-tiered approach should include near term, midterm, and long term charts of the NASDAQ, S&P 500, DJIA, and Russell 2000.  That means there are 12 charts in this observation, and they are all interrelated.  The near term charts should all be drawn independently, but compared horizontally across all of these markets to identify any anomalies, as should the midterm and long term charts, and support and resistance levels should be defined for each of them. 

Let's assume that the market of choice was the NASDAQ; we certainly like it because it moves better than the S&P and DJIA but it is much more reliable than the Russell 2000.  Once we create these 12 charts and compare them horizontally we will have 2 or more data points (support and resistance levels) for the NASDAQ on a near term, midterm, and longer term basis.  That means we will have six data points altogether (or more), and with that we will be able to create an array. It is that array that acts as our indicator of opportunity.

The array can be truncated to remove near term observations, and it could also be exclusive to longer term data if that was preferred, and by being more exclusive the number of triggers that come decline significantly sometimes, but regardless of the inclusion or exclusion choices the observations remain the same. 

Once the array is defined, include the price of the market in the array, and when the price of the market approaches the first support level in the array, consider it a signal to buy, but if it is approaching the first resistance line it would be a trigger to short, and that is where the short side opportunities come from.

Notice though, this indicator also identifies the long side opportunities, so it is not exclusive to the short side of the market.  Instead, it enables us to achieve results on both sides of the fence, and that enables us to have the opportunity to capture more than simply what the long side is offering.  That is, after all, the goal of this effort; we want to empower our competitive advantages.

Another way of doing that is by using a Sentiment Table.

Take a look at this Sentiment Table and think about how it could be used to define near term overbought or oversold conditions:  

Sentiment Table

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