Fly Fishing the Stock Market: How to Search for, Catch, and Net the Market's Best Trades

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If the 10-minute Drag Setting is a good system for balancing risk with reward while trading a triple-leveraged inverse ETF, could it be a good contraindicator for an impending reversal of the index that it represents?

For example, I often trade small positions of TZA, QID, SDS, and others as hedges against unwanted and often unexpected downswings. When I do, I use the 10-minute Drag System to guide my exit. I have noticed that this tool can also be used as an effective forecasting tool for an intraday reversal in the index for which it serves as a proxy. This is especially true in the triple-leveraged ETFs that move quickly, giving a quick foreshadowing as to how the larger, slower indexes will respond. So if and when an alert/trigger flashes to sell TZA, it also inversely signals an upside impending reversal in the corresponding index (in this case, the Russell 2000) or general broad market (the S&P 500). This strategy works especially well in markets that have big moves (i.e., up or down more than 1 percent).

In my trading platform, I have a workspace that includes a 10-minute chart of TZA beside a 10-minute chart of SPY, which I monitor routinely for these precise turning point signals.

In the charts in Figure 10.10, you can clearly see how the TZA sell signal foreshadows an impending reversal on the SPY 10-minute chart.

FIGURE 10.10 TZA 10-minute chart forecasts broader market reversals.

TZA 10-minute chart on the left and SPY 10-minute chart on the right, indicator ...