Apples, Oranges, And Watching The Ball

This will be a great week to ignore the noise and watch the ball.  Futures fizzled overnight from the Greek election euphoria to the nagging realization that Spain's bond yields keep rising.  At the G-20 meeting in Mexico, Chinese and Indonesian leaders expressed cynicism and frustration regarding the lack of solutions by European leaders in response to the EZ debt crisis.  So expect hope to clash with reality there too.  And don't forget the FMOC announcement on Wednesday.  More drama there as well.

I continue to see the possibility of 1345+ to line up with the trend line I showed last week as well as the 50-day MA at 1348.  However, the way the daily chart is structured, anything under 1306.62 would be hugely problematic for continued higher prices.

Regarding charting, I must comment on something.  I was following a newly popular chartist and CNBC contributor until I noticed a comment she made about certain ETF structures not supporting certain patterns in the S&P 500 index (she didn't respond to my question, either, haha).  I had wanted to get her explanation as to why she would use ETFs to project price on the very same instrument they're derived from.  Who knows, maybe I would have learned something. 

ETFs are mutual funds that use derivatives and futures and other leverage to mimic price movements of the underlying price.  In plain language, she is mixing apples and oranges.  This can lead to false signals and faulty analysis.

If you want to compare ETFs to other ETFs, that's great, you can get some really excellent info such as comparing SPY relative strength to IYG, HYG, and JNK, a cool trick I learned from Tim Backshall.

But do not get sucked into attempting to glean info about what the S&P might or might not do based on SSO, SDS, BGU, BGZ, UPRO, SPXU, TNA, TZA, or any other product.  The keyword here is product.  They're leveraged creations meant to be used as trading vehicles.  Just like the ES, only more so, these "apples" can be pushed around by large orders as well as traders trying to game price.  This can lead to misleading price patterns vs. "oranges" if you will, by this I mean the S&P 500 index, which doesn't trade and just is.

I see a lot of this lately as the popularity of ETFs increases.  One fellow whom I followed for a few days seems to base his entire trading strategy on letting the price action of a foreign currency ETF over a year ago tell him what the S&P is going to do now.  First, why not use AUDUSD?   Second, not only do these fractal relationships have a nasty tendency to evaporate just when you least expect it (no matter how amazing the correlation is), I find it naive to use a CurrencyShares trust instrument (held at a JPMorgan depository, no less) designed to act like a security to generate price projections on the S&P 500. While the trust holds no derivatives, he is in bed with a fine group of folks who serve as market makers: Citadel, Goldman, JPMorgan, Knight, Merrill, and Morgan Stanley.  These cowboys can do whatever they want to this FXA thingy: it only trades 400,000 shares per day (vs. 150 million for SPY, for example).  I wish this guy good luck.

When index trading (such as the S&P 500, for example), chart the S&P index, while you trade the ES, SSO, SDS, or whatever you want.   But chart apples to oranges at your peril.