UVXY - Just stick to the game plan

The markets could drop further and VIX/UVXY can go higher.

A quick look at the weekly VIX chart shows that there’s still lots of upside potential if the markets decide to crash.

And the weekly charts for the S&P 500 and Nasdaq certainly don’t give any reason to believe that the weakness since the start of the year is about to end any time soon.

Still, reversals can come quickly, so it’s important to have a plan. If we look closely at the plan we've been following for UVXY, it’s been working flawlessly. In my last article, on April 15, we were up 417% YTD. As of Friday, May 6, we’re now up 884%.

To be honest, I never expected such incredible results, and without the extended period of market weakness, it wouldn’t have been possible. Regardless, the strategy has proven itself effective without any ‘prediction’ of what the market will do next. That’s important, since predicting the market can be extremely difficult, especially for ‘Mom and Pop’ traders. Our strategy for trading UVXY is extremely simple and can be understood and executed by all traders, beginners and experts alike.

Let’s take a look at what happened in the past 3 weeks.

Remember, the main strategy is to buy early in the day if it’s moving up and stick with it as long as possible. We bought early April 14 and held at the close since we were up 6.7%. It’s pretty clear that you would have sold on Monday, April 18, but you may have waited till Tuesday if you were ‘expecting’ the markets to fall. If you didn’t sell early on Tuesday for a small gain, then you broke the fundamental rule of never holding for a loss.

I was completely ‘expecting’ the markets to continue a slow climb, and without my rule to buy UVXY early on a move up, I likely wouldn’t have bought early on Thursday, April 21. It was really incredible to watch the markets slowly float lower, like a hot air balloon with no gas being fired to push it back up. There was simply no buying and it lasted for 2 days.

On Monday, April 25, you would have sold for a nice gain of 38 to 45%. We held on for longer as it fell so only got +38.6%. With the strong rally in the markets to close the day, there was no reason to expect a reversal on Tuesday, but the buy early rule got us in the game again.

It’s also important to set alerts to catch mid-day reversals, which tend to happen at specific times, in this case, 2:30pm and after the FOMC meeting at 2pm on Wednesday. Perhaps some traders were expecting a reversal the next day, but we simply bought early following our rule without any expectation of what was likely to happen.

If a goalie or defenceman is ‘expecting’ the shooter to make a certain move or shot, he may or may not be right, but he’ll get beat every time if he commits early instead of simply being ready for what may or may not happen. Trading UVXY is exactly the same. Simply be ready for the move and then stick with it.

To emphasize what might be coming, let’s look at the VIX for 2008.

Similar to this year, there was elevated volatility to start, but this year it popped higher again on April 21, which I wasn’t expecting. It could have easily continued lower like it did in 2008. On September 16, it looks like another peak in volatility and it’s reasonable to ‘expect’ the markets to rally and volatility to drop. This next chart shows what happened to anyone who was faked out by their expectations.

Suddenly, those ‘large’ moves all year look tiny, and not staying with it after September 16 meant you missed an enormous move up. You can also see clearly that you would have bought the next day, sold the next and re-bought again the next. After that it was pretty clear a serious market drop was possible, but you still just stuck to the simple rules and managed to enjoy the ride all the way to the top.

I’m not ‘expecting’ a huge market drop this year, but if it happens, I’ll be long for the ride with UVXY. We sold out on Friday, as per the rules, and we’ll see what next week brings.

We’re at the upper range for ‘normal’ volatility, but when the markets crash, VIX always hits around 90, so be ready to enjoy the ride with UVXY.