SDS: Broken Indicators...Broken Systems

On May 13, at Blue #2, we had a positive divergence in the MACD of the SDS (SPX UltraShort). Price had gone lower, but the MACD didn't confirm the lower price in the SDS, and the MACD had gone up through its signal line once again, which "can be" construed as a Buy Signal.

There's an old saw, "In a Bear Market, your Buy Signals are a Sell. In a Bull Market, your Sell Signals are a Buy." That's just a rule of thumb. There's no ALWAYS in the stock market.

At the Blue #2 positive divergence in the MACD, if we took that as a Buy Signal, we would have bought into a top in the SDS. Price went only $0.48 higher, then the SDS went down to a new low. UGH.

Blue #3 was a DOUBLE positive divergence. Price had made two successive "lower lows." The MACD had made two successive "higher highs." Buying the SDS there worked out better. The SDS rallied to the bottom of the Kumo (Cloud), pulled back to Blue #4, where the MACD pulled back toward the signal line. The 8-day Kijun-sen (green line) had made a Bullish Cross of the 21-day Tenkan-sen, then the SDS and the MACD rallied in unision to Blue #5, on July 8.

On July 8, the MACD finally crossed above the zero line, issuing a Buy Signal. That "Buy Signal" was the EXACT TOP for the move in the SDS, right at the top of the Kumo (Cloud), which proved to be resistance. Remember...

"In a Bear Market, your Buy Signals are a SELL." Not ALWAYS. At Blue #3, the Double Positive Divergence was a decent Buy. But, the "bullish" cross of the zero line in the MACD on July 8 was deadly. It was a SELL, not a buy. The indicator wasn't broken. It acted as indictors do, in a bear market. They give us "false" signals, which is information that is just as useful as valid signals. They tell us to do the opposite.

We can see how technicians feel that their indicators and/or systems are "broken," but as we often discuss, indictors and systems must be viewed in context with what PRICE is doing. In this case, PRICE failed at Kumo resistance on July 8, which we know was a bottom in the underlying SPX. If anyone bought and held the SDS on that July 8 Buy Signal in the MACD, they currently are down 31.8%. UGH.



At yesterday's new low in the SDS, the MACD pulled back to the signal line, and it's positively diverging with price. The MACD is at -1.889. The signal line is at -1.924, so it's poised for a "slap shot" to the upside, like a puck sliding into the hockey stick, and then....WHACK...slapshot to the upside.

Yesterday's candle in the SDS is a Bullish Hammer, but it's only bullish with upside confirmation. Initial confirmation of anything bullish for the SDS would be a print high of 43.28, above yesterday's high.

The SDS still in freefall, knife-catching mode. Anyone who has been caught with his/her hand in the cookie jar has gotten it slapped very severely, but this setup could be good for at least a pop to the upside, and possibly more if it can print 43.28 and continue higher.

CAUTION: Knife-catching can be dangerous to our wealth. I don't make recommendations. As always, if we play anything, USE A STOP.