Trading Price Action Trends

Chapter 9

Exchange-Traded Funds and Inverse Charts

Sometimes the price action becomes clearer if you change something about the chart. You can switch to a bar or line chart, a chart based on volume or ticks, or a higher or lower time frame, or you can simply print the chart. Several exchange-traded funds (ETFs) are also helpful. For example, the SPDR S&P 500 ETF (SPY) is almost identical in appearance to the Emini chart and sometimes has clearer price action.

Also, it can be helpful to consider the chart from an opposite perspective. If you are seeing a bull flag but something doesn't seem quite right, consider looking at the ProShares UltraShort S&P 500 (SDS), which is an ETF that is based on the inverse of the SPY (but with twice the leverage). If you look at it, you might discover that the bull flag that you were seeing on the Emini and SPY might now look like a rounding bottom on the SDS. If it does, you would be wise not to buy the Emini flag and instead to wait for more price action to unfold (like waiting for the breakout and then shorting if it fails). Sometimes patterns are clearer on other stock index futures, like the Emini Nasdaq-100, or its ETF, the QQQ, or its double inverse, the QID, but it is usually not worth looking at these and it is better to stick with the Emini and sometimes the SDS.

Since an ETF is a fund, the firm that runs it is doing so to make money and that means that it takes fees from the ETF. The result is that the ETFs don't always track exactly ...