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 daytraders 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.
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Al Hill Administrator
Al Hill is one of the co-founders of Tradingsim. He has over 18 years of day trading experience in both the U.S. and Nikkei markets. On a daily basis Al applies his deep skills in systems integration and design strategy to develop features to help retail traders become profitable. When Al is not working on Tradingsim, he can be found spending time with family and friends.
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