Traders, I noticed an interesting correlation between the UVXY and the price movements in the S&P 500. Too often, traders are
day trading UVXY
as a proxy to lever up on movements in the S&P. This can be detrimental to
even when markets are highly volatile. It is important to understand when divergences are forming in the UVXY. These divergences gave me a basis for believing the market was due for a bounce of of Monday’s lows. On Monday, June 27th, the S&P 500 gapped lower and continued lower by 45 points intraday. At the same time, the UVXY was failing to take out its highs from Fridays large decline. Therefore, as price declined, volatility was declining also. This was our first warning that the decline was getting ready to reverse course.
Make sure that you only day trade UVXY when volatility is picking up in the market and when it continues to stay strongly correlated to movements in the broad markets. Low volatility will lead to headfakes galore if you are trading UVXY. In this trade example, you will learn how why it is important to keep an eye on the correlation between a broad market index such as the S&P and how to spot breaks in that correlation.