What I'll be looking for before entering (XIV) long trade:
As you all know, the VIX spiked nearly 40% last week. Anytime I see a spike like this in the VIX, my attention turns to potential long opportunities in (XIV). What is XIV? Here is the description from etfbd.com:

"This product is the inverse component to its cousin VIX ETN. The product seeks to generate returns by taking short positions on the CBOE Volatility Index. XIV works as a great tool in bull markets, as it typically moves along with general equities. This begs the question; why not just invest in a blue chip ETF? XIV offers more complexities than a simple blue-chip fund, in that its behavior can be very different. This product can really shine during horizontal markets, where volatility is flat, as are equities. While major indexes will remain at constant levels, this product can benefit from low volatility in overall markets, and create a nice return for its investors. Similar to its cousin fund, VXX, this product is not meant for the average investor, and should be handled with great care when being added to a portfolio."

To put it simple, this ETN basically shorts volatility. Many investors/traders use this product incorrectly and believe they can just buy and hold it. This is probably the worst thing you can do and the -16% down move on Friday proves this. My personal studies have shown that the best time to buy this product is after a decline of at least 25-50% from recent highs. Also, my personal studies show that the best time of the year to go long XIV is in the August-November time frame. Volatility is the most mean reverting product I've found in my 13+ years of trading/investing.  Although it's mean reverting, that doesn't mean that this product has no risk. The risk when going long a product that shorts volatility, is that volatility continues to go higher and this product essentially goes to 0! How do I protect myself from this potential risk? I NEVER USE MARGIN and only risk a small % of my overall portfolio in a XIV long trade. I also take a little bit of a longer term perspective. Normally when I enter a XIV long trade, I'm prepared to hold for up to 1 year.

So here's what I'll be monitoring before entering a (XIV) long trade:

  • Daily and weekly RSI: I'll be looking for these 2 relative strength indicators to potentially get into oversold territory below 30.
  • Positioning among hedge funds: Hedge funds were short a record amount of VIX futures before this big 40% spike in vol. I'll be watching to see when a majority of them cover their VIX short.
  • Price movement: My studies have shown that when XIV is down about-25-50% from recent highs, that's a decent spot to start to build a position.
  • Volume: I'll be watching for volume of over 70million shares for a classic sign of capitulation.

Now monitoring these 4 data points and then going long XIV will not guarantee a successful trade, but it should definitely put the odds in your favor!

Thank you for reading!

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