SDS ETF Raises Questions About Market Direction

Has the SDS lost its way or is the market on a historical stimulative binge? There has been a complete reversal in sentiment in the markets and technical indicators seem to be fooling as well. Yesterday the SDS looked to be making a double bottom formation. Early this morning it was questionable. Is the SDS luring investors into the sour mood of the economy just as the markets make a break for blue skies?

With the market opening higher this morning a key technical number for SDS was taken out. Although a close below this level does not seem eminent, so far technically the SDS may have to regroup further to make a strong move higher.

Here is how it looked before this mornings open. Yesterday, October 6, 2010, the SDS ticked 28.38 in the pre market. This is a key support level for SDS and a penny above the March 26, 2010 low of 28.37. SDS traded to a low of 28.43 after the market opened retesting this level successfully in the early afternoon. If the SDS had held this low today and the markets had begun to correct, a significant move could have developed to the downside for the S&P and to the upside for SDS.

Has the SDS lost its way or is the market on a historical stimulative binge? There has been a complete reversal in sentiment in the markets and technical indicators seem to be fooling as well. Yesterday the SDS looked to be making a double bottom formation. Early this morning it was questionable. Is the SDS luring investors into the sour mood of the economy just as the markets make a break for blue skies?

Is this move still in play? While the SDS pattern will have to be reevaluated in upcoming trading sessions, a break of 4 cents on light volume does not draw a clear picture just yet. SDS traded to 28.33 in open market session and 28.23 in pre market, the technical take away being that the previous low did not hold today. There seems to be short term room to the downside for SDS and perhaps a bit more rebound for the markets. It could signal that the pattern is resolving itself at lower levels and the markets are resolute to hit a high mark despite weaknesses.

Before todays brief break of longer term support, SDS had calculated upside potential. The 39.12 price high on July , 2010 could have been in fact a wave 5 of a parent wave 1, SDS could have headed towards 52.40. The recent pull back testing the March 2010 low could have retraced up to 100% of its prior move and still maintained the uptrend projected price targets. The chartists may find a dilemma in todays price action if their analysis also reverses, as the next move for the markets will likely be strong.

If you consider the psychological aspects of a price high and a price low, it could be said that it takes a investor a while to unload at the top. People are optimistic by nature and do not want to let go of what has been in their favor to hold onto. At the bottom people unload very quickly being overcome by what has happened instead of being analytical of what may not happen. The price break today could have been a signal that there is more room to the downside for SDS and to take your position off. It could have been that there are not many traders trading this ETF any longer to support technical levels- also negative. Or, the break could be a head fake for the retail investor signaling the “all is clear” sign. Just as the professionals sell them their longs, retailers cover their shorts and the market reverse lower.

This is a common occurrence at any time frame. When looking at the SDS and broader markets right now however, the time frame and price motion turning points are perhaps very large. In turn, again, the resolution of this latest move in the markets has the potential to be large.

Short term traders bullish on SDS using the wave developed today from 28.33 to 28.76, can try to trade SDS with the same low in mind to 29.80 and 30.71.

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