Quite a Week for Leveraged ETFs

Since the lows of last Friday, here's how some of the leveraged ETFs from my ETF Trading Clusters sheet have done:

• +145% (FAS) 3x Russell 1000 Financial Services
• +87% (UYG) 2x DJ U.S. Financials
• -53% (SKF) -2x DJ U.S. Financials
• -70% (FAZ) -3x Russell 1000 Financial Services
• +85% (ERX) 3x Russell 1000 Energy
• +54% (DIG) 2x DJ U.S. Oil & Gas
• -40% (DUG) -2x DJ U.S. Oil & Gas
• -56% (ERY) -3x Russell 1000 Energy
• +93% (TNA) 3x Russell 2000
• +56% (UWM) 2x Russell 2000
• -39% (TWM) -2x Russell 2000
• -53% (TZA) -3x Russell 2000

It's breathtaking.

The signal to switch from short to long based on MACD and RSI measurements happened last Friday for the financial sector and the small cap sector. It did not happen for the energy sector. For traders, if you owned the short ETFs (-3x, -2x, or -1x), you should have already stopped out on Monday. If you own the long ETFs (3x, 2x, or 1x), you should keep holding until they reach overbought, with stops in place.

Where to place the stops? Usually, traders stop out in the -8% to -12% zone, though it differs per trader and per trade. With these jumping beans, though, a wider stop has been better in order to avoid getting whipsawed. Their daily fluctuations are enormous.

Where do we stand now? Right in the middle. The longs are not overbought and the shorts are not oversold. I would not commit any new money to either camp now. I'd wait for much better odds, like we saw at those picture perfect lows last Friday.

For a nice rundown of the volatility of the 3x ETFs, see the article by Bespoke posted Wednesday morning.

Keep in mind that these comments pertain to trading. They have nothing to do with whether we're seeing a bear market bounce or a genuine recovery. Either way, I'd keep stops in place on the longs and wait for a better set-up on the shorts.

Comments

[Here's a th...:]

Stops need to include a time based window as well.
Recently P.S .UltShrt QQQ ETF QID fluctuated 10% to the downside and rallied 20% to the upside all in the same day.

2008 Nov 28 10:03 AM