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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. Investors should do their homework on this aspect before using them.
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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 these issues compound daily.  Investors should do their homework on this aspect before using them. 

To accomplish satisfactory or superior performance, we use


charts for


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


and the index rather than


(ProShares 3 X Leveraged Bull ETF) or


(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 share 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 can be overlooked, but important sectors.

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Let's look at popular


compared to


in both




formats with data from roughly 11 AM today.

All the charts feature the same basic annotations whether weekly or daily. These include candlestick price bars; a five period simple moving average; Keltner trading bands; and, Tom Demark Sequential Counts.

The first chart is a weekly view of XLF including data through yesterday 5-25-10. Here you'll note the first level of discipline is following the basic trend set by Keltner bands. Doing so keeps you out of trading ranges or sloppy trends. Next are DeMark readings where a weekly sequential "9" generally may indicate a change in direction especially if markets are extended whether up or down. You'll note such a reading was registered in mid-April for XLF.

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Once a warning of a trend change is established by a DeMark sequential 9 as noted in the chart above for example, we would turn to daily chart views. 

Below is the daily chart of XLF followed by a daily chart of FAZ featuring the same indicators. However it contains live quotes for 5-26-10. We note another unique DeMark sequential "9" count coinciding in time with the weekly chart. This is a more powerful indication that a change in trend is possible allowing for a trading opportunity in FAZ (Direxion 3 X Financial Bear ETF).

Due to volatility, rising Keltner Bands and an inconsistent 5 period MA you couldn't short by buying FAZ until 5-17-10 at least following our rules. Then you could have entered a trade in FAZ at around the opening price of $13.78.

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closes today below $16.94 or the 5 period MA, I would suggest exiting.

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.

Readers are able to make requests for coverage of other sectors as they wish.

The ETF Digest maintains no current positions in




and the aforementioned is merely an example of how trading these markets might be pursued.

Dave Fry is founder and publisher of

ETF Digest

, Dave's Daily blog and the best-selling book author of

Create Your Own ETF Hedge Fund, A DIY Strategy for Private Wealth Management

, published by Wiley Finance in 2008. A detailed bio is here:

Dave Fry.