Stocks' Slump Is Great for UltraShort ETFs

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ProShares UltraShort Utilities (SDP) ETF

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Source: TradeStation

ProShares UltraShort Utilities (SDP - commentary - Cramer's Take) has been consolidating in a tight range for weeks, holding at support of both its 20- and 50-day moving averages. Now it is attempting to break out above the high of that consolidation, which also corresponds to a breakout above its intermediate-term downtrend line.

I like SDP for entry above $92, as that forces SDP to clear resistance of its Nov. 13 high as well.

You may notice that SDP trades an average daily volume of only 45,000 shares. However, unlike individual stocks, in which liquidity can greatly affect how a stock trades, remember that all exchange-traded funds are synthetic instruments. As such, the amount of average daily volume that an ETF trades is, for the most part, irrelevant.

Even if a particular ETF had no buyers or sellers for several hours, the bid and ask prices would continue to move in correlation with the market value of the ETF that is derived from the prices of the underlying stocks. An ETF with a low average daily volume may sometimes have slightly wider spreads between the bid and ask prices, but you can simply use limit orders if that's the case. I trade for points, not pennies, so occasionally paying a few cents more is not a big deal.

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Know what you own: Wagner mentions DUG, which inversely tracks the oil and gas sector. Companies in the industry include ExxonMobil (XOM - commentary - Cramer's Take), Chevron (CVX - commentary - Cramer's Take), BP (BP - commentary - Cramer's Take), Marathon Oil (MRO - commentary - Cramer's Take) and Shell (RDS.A - commentary - Cramer's Take).

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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.