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Trading Leveraged ETFs: Dave's Midday

Generally speaking we use leveraged issues for trading purposes in Dave's Special Portfolio (DSP) at the ETF Digest . 

We're a proponent of using these issues tactically mindful that many of these issues compound daily. Investors should do their homework on this aspect before using them including reading the prospectus for each issue. Leveraged issues are only suitable for sophisticated and active investors.

To accomplish satisfactory or superior performance, we use weekly/daily charts for DSP as they accommodate the unique aspects of these issues. Many day traders opt for intraday or shorter-term time views. 

The important factor is to key all our activity directly to the index and/or unleveraged ETF rather than the leveraged issue. Therefore, if we have an actionable signal for the S&P 500 Index, our decision is based on the behavior of SPY and the index rather than UPRO (ProShares 3 X Leveraged Bull ETF) or SPXU (ProShares 3 X Leveraged Bear ETF).

Liquidity considerations drive the next level of selection. After all, good trading and execution characteristics are essential to success. Remember, newer issues, no matter how seductive they may seem, need to build a following and this is especially true for retail investors and financial advisors who lack the capacity to create new shares in 50-100K increments.

Occasionally, a new leveraged issue will come to market with little history but meet with strong initial demand due to a linkage to a popular index where there is little competition. Commodity and currency issues are common examples and are overlooked, but important sectors.

Today we'll feature gold as represented by GLD (SPYDR Gold Trust) paired with DGP (PowerShares DB Leveraged 2 X Gold ETN)

First, is the weekly chart of GLD to form the setup by identifying the overall trend which is positive but extended noting the DeMark sequential weekly "8" reading. However, despite the "8" reading, few other indicators show gold overbought or extended. This will bear close watching this week.

You'll note the three Keltner bands are rising as is the 5 period moving average. Therefore the trend is bullish but mature. Further, the large correction the previous week knocked a lot of shorts out including us. But, when you're trading you press on.

Next up is the daily chart of GLD with similar annotations and indicators followed by the daily chart of DGP.

With all systems in a buy phase, we were able to take our position in DGP and will hold it until we reach our stop which will first be based on readings of daily GLD analysis combined with an impending DeMark sequential "9" reading on weekly charts.

While this trading information is incomplete as to the entirety of indicators utilized, ETF Digest subscribers are able to view the complete trading methodology as they're implemented.

This is a demonstration and is not intended the reader buy or sell any security.

Readers are able to make requests for coverage of other sectors or ask questions about leveraged issues by emailing me at dave [AT] etfdigest [DOT] com.

Disclaimer: The ETF Digest maintains positions in GLD and DGP.

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