"Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing. Therefore, just as water retains no constant shape, so in warfare there are no constant conditions."
-
Sun Tzu

Monday, October 8, 2012

5 Reasons Why I Shorted Small Caps

I added TZA, the inverse leveraged ETF, to the Covestor Model Portfolio last Friday for a swing trade to benefit from current weakness in small cap stocks.

1) Underperformance vs. S&P 500: small caps are not confirming the latest rally
2) Intraday chart setting up a failed breakout trade from 835 - 845 range. 
3) Daily chart setting up an "anti" trade (check out Adams Grimes or Linda Raschke for reference)
4) Potential rejection of long-term high at 860 could setup major top and lead to large downside move due to trapped investors. 
5) Russell 2000 a good proxy for risk-on/risk-off sentiment, expecting larger moves when overall market turns south. 

Here is design of the trade with entry and exit points. Note that (as usual) there is no guarantee that this trade will work out. There might be a 51-60% chance that the position will be profitable: