MLR - How to play the TVIX

Published : September 19 2011 at 9:34 ET

Based on going 100% long the TVIX on a sell signal issued by the Market Direction Model, and 100% short the TVIX on a buy signal issued by the model, one would be up just under 300% since the model's sell signal issued on September 2, 2011. TVIX is the most volatile ETF when the market has bad breaks to the downside, thus this explains the massive gains in such a short period. Know that such bad market breaks are rare, but we are in what we have coined the "chop zone" on numerous news shows, so there is a larger than normal opportunity to be on the right side of TVIX by using the Market Direction Model's sell signals.

The model remains on its sell signal. Major indices and ETFs have returned close to their original prices when the sell signal was first issued on September 2, 2011, thus the market is giving investors a second chance of sorts, assuming the market does not continue higher but is rather derailed by the cancerous fundamental backdrop. As of this writing, NASDAQ futures are trading -1.5% lower than Friday's close. The TVIX is therefore spiking higher by 8.8%.

Ways to trade the TVIX:

1) Set your maximum stop and position size based on your risk tolerance levels. Some may choose to pyramid into TVIX, buying a certain number of shares every time the TVIX moves higher by some amount. Some investors may steer clear of TVIX since it is so volatile.

2) Some may choose to set multiple sell stops on TVIX to pyramid out of their position to have a shot at some profits in TVIX even if not with their whole position. It allows one to downsize their position if some of their stops are hit, but still have "skin in the game" should TVIX then launch higher from there.

3) Aggressive investors may set a fixed percentage of their account into TVIX and remain in the position until the Market Direction Model switches back to a cash or a buy signal. On a buy signal, they would sell their TVIX and go short the same amount of shares in the TVIX.



We send this out earlier:

The fundamental backdrop continues to look as disturbed as ever. The Greek bailout situation is looking dire, and new Euro-dominoes could topple in the European fallout with countries that are "too big to bail" such as Italy and Spain. This could make the Lehman bankruptcy that occurred in the U.S. back on September 15, 2008 seem small by comparison.

The recent news that the Federal Reserve will be coordinating with the European Central Bank to provide loans has caused the much maligned stock markets in Europe to bounce, the euro to strengthen, and the dollar to reverse its short term uptrend. Money which flowed into gold as part of the fear trade has reversed back into the euro which has put short term pressure on the price of gold.

But because European banks needed to seek the help of the Federal Reserve, it also means that cash levels at these European banks is very low. Further, with more of this quantitative easing money printing shell game going on in both the US and in Europe, it only prolongs the problem of mounting debts. As we have said on CNN's Wall Street Shuffle, if the economy were a patient with a tumor, the central banks are pumping the patient full of morphine a la quantitative easing which makes the patient feel better in the short run, but ultimately does nothing to kill off the tumor which just grows larger.

As we have said, higher gold prices are in the offing in the long run. While gold will experience some bumps along the way, as has been the case since it began its long term uptrend back in 2001, its long term uptrend should remain intact. Silver, gold's cousin, roughly correlates with gold, so should also find price stability in this current basing pattern it has been forming, then eventually move higher. How long it takes to complete its basing pattern is anyone's guess. If price history is any guide, silver based for 9 months Dec '09 - Aug '10 before breaking out. SLV is currently in the fifth month of its basing pattern. However, the number of tailwinds that argue for higher prices in gold has risen so the basing pattern could complete sooner.

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