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Don’t want to short? – Inverse ETF’s might help


 

 

Some traders just don’t like the idea of shorting stocks. Some have been led to believe that shorting is dangerous. Some think of it as unethical. Some ignorantly think it is illegal. Whatever the reason, it keeps them from taking advantage of the natural half cycle of the markets.

 


As anyone even remotely following the market knows, stocks don’t just go up. They tend to go down as well. Infact, they go down much more violently than they go up. Think of it psychologically. Fear is a more potent force than greed is. The thought of losing one’s money is a more powerful instigating force than the thought of missing out on a profitable trade. ‘Sell first, ask questions later’ is very common among individual investors. This is the reason stocks fall much faster than they rise (most of the times).

 


So if a trader analyzes using candlestick charting that the markets are getting bearish, what can he/she do? One can definitely liquidate long positions and book profits. Then if one doesn’t want to short the market (and assuming one is not familiar with buying Put options), there is one more way to play the market. Buy inverse ETF’s.

 


These ETF’s trade just like stocks and go higher when their respective market goes down. Some of them move twice as much higher, thus allowing you to profit twofold.
Here are some common inverse-market ETF’s.
QID – This moves twice as inverse as the performance of the QQQQ (Nasdaq100 index).
SKF – This moves twice the inverse as the performance of the financial sector.
DOG- This moves higher as the Dow moves lower.
SH- This moves higher as S&P500 moves lower.


The chart below shows the Dow Jones Industrial Average. When the Dow formed a Shooting Star on the 200 sma, it was a high probability scenario that the index would head lower upon bearish confirmation. This confirmation was indeed seen the next day. If you owned Dow stocks or index funds, this would have been a good place to liquidate them. 

Chart courtesy stockcharts.com