FAS Vs. FAZ: Bulls Vs. Bears

Zachary Musso
updated | Author's Website

In the midst of the financial crisis our country currently faces, many of us trade using technical analysis and technical indicators in order to make money.  Tonight, I’m going to outline and share my analysis of FAZ (FAZ) (Direxion 3x Financial Bear ETF) and FAS (FAS) (Direxion 3x Financial Bull ETF) from the past 10 trading sessions.  After reading this post, I hope you feel like you have an advantage going into the opening bell on Tuesday!

Let’s start off with blank charts of the two tickers.  See if you can pick up some technical patterns before reading further:

FAS  10 Day (Blank)

FAZ  10 Day (Blank)

First of all, you should definitely notice that the two charts are inverses (if you didn’t know this by their description already).  Secondly, you should be able to realize that in a 10-Day period, FAZ has been outperforming FAS, especially in the past week.  Thirdly, you should pick up on the volume spikes that are comparative to price spikes within the charts.  To wrap the blank charts up, also note that FAS and FAZ will move quickly and in large quantities, with extreme emphasis on FAZ.  Without further a-do, let’s add some technical analysis without indicators in order to make the technical patterns more prevalent:

FAS  10 Day (T.A.)

FAZ  10 Day (T.A.)

Now that we have our technical analysis on the charts, let’s move our focus to individual ticker analysis starting with FAS.  Through the 10 day progression of FAS’ technical patterns, the ETF began February trading within a channel between prices of $8.37 and $9.47.  After breaking down from 2:45pm on the 4th all the way until 9:45am on the 5th, there was an abnormal amount of volume at 10:00am on the 5th which, coincided with the price of FAS which was nearing its bottom at $7.50.  The price/volume spike continued all the way into this past week, when it hit its 10 Day high of $11.49.  When looking at this breakout, you’ll notice a very low volume towards the end of the trading session on the 9th.

To me, this indicates that the current upward trend FAS was experiencing was soon going to end.  Within this low volume period, FAS dropped from its high ($11.49) all the way to $10.81, before rebounding into the close.  This price drop of $0.68 was the largest price drop in FAS since two days prior when it first began to pick up speed.  On the 10th, FAS dropped a significant $2.99.  The market played with the financial sector all this week, as traders did everything they could to FAS to gain a buck.  After a large drop throughout most of the day yesterday, the stock rebounded with a vengeance in the final trading hour (which was also signified by the enormous buy-volume spike the ETF experienced).  On Friday, however, FAS stayed flat and formed a descending triangle pattern with a breakdown support at $7.99.

Let’s move on to the technical analysis of FAZ.  FAZ traded within in a channel ($48.11 to $54.92) during the same time period that FAS did, with a volume breakout when FAS broke down.  The price breakout from the volume push, however, formed FAZ’s 10-Day high at $59.41.  As FAS was on its 3 day breakout stint, FAZ was trending downward with a total lack in heavy volume.  The extremely low volume break down should have shown everyone trading FAS and FAZ that FAZ was going to recover when FAS showed signs of weakness.  On the 9th when FAS was hitting its 10-Day high, FAZ was hitting its 10-Day low at $38.03. Towards the close, FAZ broke out from its pennant formation and with that, FAZ’s volume began to pick up.  From the close of the 9th to the close of the 10th, FAZ exploded in volume and in price, moving from $39.44 to $49.68.  During the market’s ridiculous close on Thursday, FAZ took a large hit of $6.64 before moving higher in Friday’s session, creating the opposite pattern of FAS (an ascending triangle pattern) with a breakout resistance at $49.69.

Now that we have our technical analysis out on the table, let’s check out what some technical indicators would have shown if we hadn’t had the knowledge base to diagnose FAS and FAZ solely through technical analysis:

FAS  10 Day (T.A. w/ I.)

FAZ  10 Day (T.A. w/ I.)

FAS and FAZ coincided on many indicator trades.  The indicators used in the charts above are as follows:

  • Bollinger Bands (20, 2.0)
  • MA (20)
  • RSI (20)
  • RVI (10, 20)
  • FS%K (10)

I will be doing a separate post this weekend as to how I specifically use my indicators to isolate stock prices in order to maximize my profits, but for now, just absord the fact that each intersection the RSI and the FS%K creates, it is either a buy or a sell.  If the FS%K is moving ABOVE the RSI, it’s a buy; if the FS%K is moving BELOW the RSI, it’s a sell.  Below is a list of times, dates, and average candle prices for timed, majorly connected FAS/FAZ trades:

  1. 10:30am, 2-5-09:  FAS buy @ $8.05, FAZ sell @ $57.02
  2. 2:45pm, 2-5-09:  FAS sell @ $9.45, FAZ buy @ $47.82
  3. 1:30pm, 2-9-09:  FAS sell @ $11.26, FAZ buy @ $38.78
  4. 3:45pm, 2-10-09:  FAS buy @ $8.22, FAZ sell @ $49.45
  5. 1:00pm, 2-11-09:  FAS sell @ $8.81, FAZ buy @ $45.09
  6. 2:15pm, 2-11-09:  FAS buy @ $8.44, FAZ sell @ $47.40
  7. 3:45pm, 2-11-09:  FAS sell @ $8.84  (pre-close sell)
  8. 9:30am, 2-12-09:  FAZ buy @ $47.88  (off-the-open buy)
  9. 3:00pm, 2-12-09:  FAS buy @ $7.61, FAZ sell @ $50.42
  10. 11:00am, 2-13-09:  FAS sell @ $8.38, FAZ buy @ $46.79

From here, the indicators didn’t signal anymore trades.  The purple trade (#2) was an indicator head fake, for FAS shouldn’t have been sold and no way should FAZ have been bought.  If you would have analyzed the charts prior to using indicators, however, you would have realized this and not relied on the indicator to trade for you in this situation.  Using these indicators with your volume spikes and your price comparisons, you could have made a ton of money off of FAS and FAZ in this 10-Day time span.

As for the beginning of next week, weekend news will no doubt play a significant role as to how Tuesday’s open will trend.  For now, I would use FAS’ descending triangle pattern and FAZ’s ascending triangle pattern in order to have somewhat of a backbone to trade off of in relation to this deadly ETF/iETF combination.
Hope this helps you on your journey to tearing up the market and not letting it tear up you.

UPDATE: The link seen below is a mock $100,000 trading portfolio that backtested the RSI-%K Trading Strategy for FAS and FAZ.  The Trading Strategy itself is still in the works, but it took in some nice profits through the 10 Day time span discussed above:

http://spreadsheets.google.com/pub?key=peX30LFa4TaQ3ikIlqwTtMw

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