Technical Analysis of Ultra Financials

I’ve written a lot recently about ProShares Ultra Financials (UYG). It provides twice the return of the Dow Jones U.S. Financials Index. With UYG up 50% since last Friday, people are wondering if it’s too late to buy now.

Let’s apply some technical analysis.

Here are the top ten index holdings by weight:

  • 8.1% JPMorgan Chase
  • 8.1% Bank of America
  • 5.9% Wells Fargo
  • 3.8% Citigroup
  • 3.1% U.S. Bancorp
  • 2.6% Goldman Sachs
  • 1.9% Bank of New York Mellon
  • 1.8% American Express
  • 1.6% Merrill Lynch
  • 1.5% Prudential Financial

Here’s how each of them is currently rated by a traditional 3-box reversal point-and-figure chart analysis:

  • NEUTRAL JPMorgan Chase
  • NEUTRAL Bank of America
  • BULLISH (Oct. 13 low pole reversal) Wells Fargo
  • BULLISH (Oct. 14 low pole reversal) Citigroup
  • NEUTRAL U.S. Bancorp
  • BEARISH (Oct. 13 long tail up) Goldman Sachs
  • BULLISH (Oct. 13 double top breakout) Bank of NY Mellon
  • BULLISH (Oct. 13 low pole reversal) American Express
  • BULLISH (Oct. 14 low pole reversal) Merrill Lynch
  • BEARISH (Oct. 13 long tail up) Prudential Financial

By sheer numbers, that’s 50% bullish, 30% neutral, and 20% bearish. By index weight among these top ten holdings only, it’s 39% bullish, 50% neutral, and 11% bearish.

As you can see, point-and-figure chart analysis gives no screaming buy signal for the top ten holdings anymore, but it gives a bullish nod. P&F; chart analysis on UYG itself issues a BULLISH signal with an Oct. 14 low pole reversal.

What do MACD and relative strength indicator (RSI) analysis of the UYG chart say?

Back in July, its MACD got down to -2.8 with an RSI at 23. Anything below 30 on the RSI means oversold and ripe for a rebound. That was July 15 with UYG at $14.75. It rebounded quickly, but the indicators didn’t top until Aug. 11 with UYG at $23.36, MACD at +0.3, and RSI at 55. The total gain before UYG turned down again was 58%.

This time around, we saw our RSI oversold signal last Thursday at 29 with MACD at -2.4 and UYG at $8.41. Even as UYG and its RSI rebounded Friday and Monday, the MACD kept dropping to -2.7. Only yesterday did MACD finally start coming back, too. UYG closed yesterday at $12.06 with MACD at -2.6 and RSI at 40.

If we overlay our current point with the July rebound, it suggests that we’re right where we were when UYG hit $19.56 on its way from $14.75 to $23.36. Put differently, if the July pattern of MACD and RSI hold now, then UYG is a little past halfway through the gains it should achieve before topping.

Whether that top is the beginning of a sideways movement, another trip south, or just a breather before continuing higher is a question we can’t answer from this side of the slope.

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