Reverse the Inverse?

Anyone who hopped aboard inverse exchange traded funds in mid-December found out that the trend is quite a friend. So, with one month gains of 50% or more, is it time to switch gears and reverse the inverse?

No. When the opinions ran the gamut last month, a picture was worth far more than a 1000 words. If you fought the trend, you paid dearly. Nine inverse exchange traded funds charged to all-time highs on record weekly volume last week (see chart of TWM below). Many broke resistance that had turned them back multiple times. Capitulations that end trends rarely come on key breakouts.

Gains of 50% in a month are unprecedented for ETFs, so they may be overdo for  a breather. Does that mean you fight the tape and try to make money on a correction? No, by all means get in harmony with the market. The play is to look to enter in line with the high probability set up; befriend the trend.

The inverse ETFs are showing no signs of reversing. They are calmly poised to snap back up and make more all-time highs. If they don't at least fail the 10 day moving average, the bullish contiuation patterns could generate forceful momentum in line with what we saw during the past month. When momentum carries equities beyond every level of resistance, you don't want to get in the way. Be prepared to pay dearly again if you try to pick a top.

TWM-ProShares UltraShort Russel 2000 ETF

Chart provided courtesy of TeleChart® by Worden Brothers, Inc. www.worden.com

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