Trading 3X Leveraged ETFs: You Can’t Take Your Eyes Away From The Trade (SPXU, UPRO, TZA, FAZ, FAS, TNA)

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October 21, 2011 12:02pm NYSE:FAS NYSE:FAZ

George Maniere: Lately I have had many readers write to me about the family of Direxion Triple Leveraged ETF Funds and the Ultra ProShares ETF’s. These are relatively new funds. The first fund was the Ultra ProShares ETF (NYSE:SPXU). SPXU was first introduced in 2009. This Ultra Short ProShares


ETF seeks a return that is three times the return of an index or other benchmark (target) for a single day, as measured from one net asset value (NAV) calculation to the next. Due to the compounding of daily returns, ProShares’ returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. Investors should monitor their holdings consistent with their strategies, as frequently as daily.

There are two companies that I know of that offer this tripled leveraged short ETF, the Direxion Company and the Ultra Pro Shares ETFs. There is an ETF for just about any sector you want to short. There are 5 different Russell sectors (midcap, energy, financial, etc). Not to belabor this but if you want to triple leverage short it – there is an ETF for you. I have one favorite sector and that is the S&P. Oddly the S&P is the only sector that you can triple leverage both short and long. The short is called SPXU and the long is called (NYSE:UPRO).

When you think the S&P is going to sell off you would look for an entry point that would give you some wiggle room for it to move down.  For the last few months the S&P has been range bound.

Please see the chart below:

As we can see on this chart today the S&P traded at a high of 1219.53 and a low of 1197.54 and closed the day at 1215.39. This was one of the least volatile days that I have experienced in the S&P for a while and just stood aside. I have found that trading SPXU works better if there are more volatile swings in the price.

Well let’s get to it. If you are of the faint of heart don’t even think about touching one of these stocks. In fact when you are trading these stocks you can’t even trade another stock. In fact you will barely have time for a bathroom break. You will see why on the next chart below:

What we are seeing here is a chart of the S&P for yesterday’s trading in I minute increments. We are also seeing the chart has been changed from a daily chart to a one day chart. Another important distinction is that the four bands (Blue, orange, green and pink) have been changed from regular moving averages to exponential moving averages. The difference between a regular moving average and an exponential moving average is that a regular moving average is simply an unweighted mean of all of the previous numbers or data that came before it and if all of the numbers are added up and divided by the number of days we would have a simple moving average SMA. This can best be expressed by the formula:

An exponential moving average (EMA) is also called a weighted moving average. The weight for each older data point is decreased exponentially. This formula can best be expressed as:

The point of an exponential moving average when it applies to the movement of stocks is that the moving averages have greater validity as they are move through the day. As you move through the day the moving average bands carry greater meaning and give you more clues as to which way the stock will move and since a trade like this is or should be for one day this becomes very important. So when you open up your chart make sure you set your moving averages to Exponential moving averages.

Another very important tool is the MACD and the histogram. I have always found that the MACD and histogram was a powerful tool but when using this tool on a one day chart the chart will almost predict what is coming next. I have found the histogram to be the one true leading indicator in technical analysis but when the chart is set for one minute it is eerie how the MACD will give you a 1 or 2 second heads up as to what is about to happen. Just take a look at the chart above and notice how the MACD mirrors the movement of the actual data on the chart.

The chart that we have been working on is SPXU which is a triple leveraged ETF of shorting the S&P. Well what if you thought the S&P was going higher what ETF would you use? You are in luck because Ultra ProShares has a triple leveraged ETF for going long the S&P. It is called UPRO and it works exactly as SPXU except it is the inverse.

This is the exact tool and technique that the hedge funds use. So let’s go over some ground rules. The 1 minute chart is 6 ½ hours of your life. If you have any other stocks make sure you put in your bid and ask before the day begins because you won’t have time once the day gets rolling. The only time you will ever take your eyes off the screen is when you take a pee, when you place a buy and when you sell.

Take a look at the chart I bought in at 10:15 today and sold at 12:20. I then had to wait until 1:20 to buy back in and sold at 2:15PM. I then waited for what seemed like an eternity but was able to buy in again at 2:50 and sold for the final time at 3:30. The market never gave me another chance to buy back in.

OK now is the bad news. You knew there was going to be some bad news right. This is poker on steroids. Take a look at the chart. The biggest move I had was $0.17the rest were less  so how do you make a lot of money at this? You have to have commit a lot of capital to it. I consider myself a small player but the smallest position I had was $20,000.00.

Let’s do the math. From 10:15 until 12:20 I made $0.17 a share. From 1:20 to 2:15 I made $.06 a share and from 2:50 to 3:30 I made $0.17 a share. That is a total of $0.40 a share for the day but when you are playing in lots of 10,000 shares that’s a $4,000 pay day.

In conclusion, I have a story about a hedge fund buddy of mine that I was having a beer with one night. He‘s not the kind of guy that talks the talk. He is more the type of guy that walks the walk. I asked him straight out one night what was the smallest trade he ever made and he told me 1 million shares. It wasn’t bragging. He was almost embarrassed to tell me. Start putting that kind of fire power under a technique like this and you can put up a strong batting average. I would suggest that if anyone wants to try this technique that they do it on paper first to iron out the kinks and get a good feel for working like this. Practice this technique before you commit and capital.

Related: Direxion Daily Financial Bear 3X Shares ETF (NYSE:FAZ), Direxion Daily Small Cap Bear 3X Shares (NYSE:TZA), Direxion Daily Financial Bear 3X Shares (NYSE:FAZ), Direxion Daily Small Cap Bull 3X Shares (NYSE:TNA).

Written By George Maniere From Investing Advice

I have an MBA in Finance and 38+ years of market experience.  In  2009, I knew the market was  seriously oversold and committed a serious  amount of capital to the  market. Needless to say things went quite  nicely but I always remembered 2 important things. Hubris equals failure  and the market can remain  illogical longer than you can.


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