It's been a little while since my last post. My stance still remains bearish, but it all depends on the monthly close tomorrow. I am expecting a monthly close below an important fib level at 1307 for the S&P 500. A close below this level will keep the much longer (multi-year) trend in a bearish stance based the way I look at fibs. Having said that, the SP500 is currently above that 1307 level, although it did break below it this morning. So, tomorrow's close is critical.

I want to shift the topic to something that has caused me a lot of pain as of late and many others that I know that were part of NWAtrading. This is regarding the recent drop in TVIX. Now, as you probably know leveraged ETF's have their own inherent risks. First, from the fact that they are LEVERAGED! Second, due to their decay factor over time. Third, this is something you may not already know and that is some of these ETFs (or ETNs) are positively or negatively affected by 'backwardation' and 'contango.' Typically ETFs that are based on futures contracts are affected by this phenomenon. So, these would include most commodity ETFs (exception is USCI) and other ETFs such as TVIX.

TVIX is based on VXX which is the VIX short-term futures ETN. VXX is affected by backwardation and contango. I will not get into the details of backwardation and contango here, there are plenty of resources on the internet if you are interested in reading further. The basic idea is that when a futures are in contango, the forward contract price is greater than the spot price and reverse is true for when in backwardation. Checkout the intelligent investor blog that goes into this in a lot more detail and explains it well.

So, my thought is this...VXX or TVIX should not be traded unless we are in backwardation. When it is in contango, you are dealing with 3 negative forces - 1) Loss of value due to leverage factor, 2) Decay factor, 3) Backwardation/Contango factor. Many of us made money while TVIX was in backwardation from mid August to end of December, but many have lost money in TVIX since it has been in contango since end of December. Would love to hear some comments. Thanks.