Let's Hear It for Boring

 | Aug 22, 2014 | 1:00 PM EDT  | Comments
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Stock quotes in this article:

XIV

,

spy

Instant news. Instant reaction. Quick! Someone get me a trade.

We are trained to think like this now. So much information is available in the blink of an eye that many folks feel it necessary to react immediately. They feel as though they must do something. If you are trading intraday or short term, you often do have to be ready to react and then react to your initial reactions. It doesn't make for a very relaxing Friday, nor any day for that matter.

But there is nothing wrong with a boring strategy either. We seem to have forgotten about them. The deep value players get pushed aside for traders trying to catch a dime 15 times over in a day. While I do like to trade, I think a nice boring strategy is good for a portion of anyone's portfolio.

For instance, I've been watching the VelocityShares Daily Inverse VIX Short Term ETN (XIV). This one gives you the potential to be boring with a little spice for trading. The basic approach I've outlined, and you can get more complex if that's your style, may result in one or two trades per year or maybe a few trades per quarter. There is no set pattern, but the risk-reward is very attractive. What I like most about XIV is simply the odds are ever in your favor. Volatility can spike. It can spike significantly, but we also know over time it will revert to the mean. Furthermore, volatility futures often sit in a state of contango. On a most basic level this benefits the XIV on a daily basis.

 

VelocityShares Daily Inverse VIX Short Term ETN (XIV)
Source: StockCharts.com

 

So, let's take a look at one possible longer-term approach on XIV using the weekly chart, including where I would buy, where I would buy secondary positions as well as sell or short points. The solid blue vertical lines represent a normal-size buy for a trader while the dotted black vertical lines are half-size buys. The dotted red lines are a full sell of the position and a second dotted red line without a blue or black line in between represents a short position. I would stay with half size on the short size since there is always more risk in being short.

The approach here is to use varying technical analysis to predict entry and exits in XIV. I did include the SPDR S&P (SPY) performance at the top of the chart because you could use the same idea on the SPY entry and exits if there was a preference. Here, I would be looking at buying whenever I saw a bullish crossover on the price momentum oscillator. I adjusted the settings to 21,13,8 to bring in a Fibonacci touch. Since this is a weekly chart and I'm trying to catch a turn earlier, these are somewhat aggressive settings, but with volatility, I believe that is needed.

A second entry is used by combining the On Balance Volume with a 24-week moving average. I want to buy XIV whenever the 24-week MA crosses over the OBV or any time it retests the OBV after trading above it. This will create more trades than the PMO alone and stronger trades in my view. This is the full-size entry, where the PMO indicator can be a half size or full size, depending on the risk tolerance of the trader.

On the sell side, I am using the 20-period Bollinger bands with a 2.5 standard deviation. This is a similar strategy I use when shorting iShares Barclays 20+ Year Treasury Bond Fund (TLT). When XIV pierces the upper Bollinger band, then it is time to exit. I did add a 10 period, 2.75 standard deviation band shown with the red lines just as a yellow flag alert on the downside. When XIV price pushes that lower band, the stinky stuff may be about to hit the fan. It is just for informational purposes only. It also often signifies a buying opportunity is very, very close.

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