Stocks' Slump Is Great for UltraShort ETFs

On Nov. 19, the S&P 500 and Nasdaq Composite finally broke down below support of their one-month bases of sideways consolidation, landing at fresh five-year lows. While this is negative for long-term investors, the breakdown to new lows may lead to steadier trends and the reduction of choppy price action that has plagued the markets for weeks. This, of course, would be beneficial to short- and intermediate-term traders who have had a challenging time holding long or short positions for more than a few hours.

When the major indices break key levels of support, it also causes the inversely correlated ProShares Short and UltraShort ETFs to break out above resistance levels. Here are two UltraShort ETFs that are poised to break out above resistance in the coming week:

ProShares UltraShort Oil & Gas (DUG) ETF

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Source: TradeStation

Designed to move in the opposite direction of the Oil and Gas sector, ProShares UltraShort Oil & Gas (DUG - commentary - Cramer's Take) is poised to move back above resistance of its 50-day moving average. DUG initially attempted to break out above its 50-day moving average on Nov. 12, but the stock market's rally on Nov. 13 caused it to fall back down. Roughly converging with the 50-day moving average is DUG's intermediate-term downtrend line from the Oct. 10 high.

An ideal buy entry in DUG is the $46-to-$47 range, as this is far enough above the 50-day moving average/downtrend line convergence to confirm the breakout. For an approximate price target, I would look for DUG to move back to its prior high from Oct. 10, around $59 or $60. This equates to a 50% Fibonacci retracement from the October high to the November low. Consider a tight protective stop below the Nov. 20 low and 20-day moving average (around $41) to protect against a possible failed breakout.

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At the time of publication, Wagner had no positions in the stocks mentioned.

Deron Wagner is the founder and head trader of Morpheus Trading Group. His daily focus is managing and trading the Morpheus Capital Hedge Fund, which he founded in April of 2004. He also teaches his trading methodology with The Wagner Daily, The MTG Stalk Sheet, and The Wagner Weekly newsletters.