TNA Uptrend Close To Terminal Phase?

12/21/10 08:19:43 AM

by Donald W. Pendergast, Jr.

When a triple-leveraged exchange traded fund gives hints that a powerful trend may be about to stall, savvy traders begin to size up the situation more closely.

Security: TNA
Position: N/A

If you've never traded Direxion Shares exchange traded fund (TNA), well, why not? This thing, a derivative tradable from the Russell 2000 index side of the market, really likes to run once it gets going, and if you can manage to stay on the right side of its dominant trend, you could make a lot of money. Here's a brief look at the current monster uptrend now at work in this incredibly volatile ETF (see Figure 1).

FIGURE 1: TNA, DAILY. Trend-followers can always use a long-term money flow indicator to help give advance warning of when a mature trend may be ripe for a reversal. This is likely not a good time to be adding new long positions in this super-volatile, triple-leveraged stock index ETF.

Graphic provided by: MetaStock.

Graphic provided by: Darryl Guppy MMA from MetaStock v.11.

When they say "triple leverage" in regards to TNA, the statistics can vouch for the veracity of that assertion; TNA is up more than 110% since late August 2010, while the Russell 2000 index (.RUT) has "only" managed to rise a bit over 33% in the same length of time. Clearly, for equity traders who can handle the rigors of trading such a violent market, trading TNA with a proven system or method may be just what the doctor ordered.

One of the better ways for position and/or swing traders to stay on the right side of the trend in this market is to use the Darryl Guppy moving averages (available in many charting packages under a variety of names such as moving average ribbons, Guppy MMA, and so forth). Guppy has written extensively about all the incredible ways to use and profit from these averages, so don't expect a full explanation here. Basically, trend-followers would do well to watch for the shorter (blue) set of averages to cross the longer (red) averages and then to wait for a proportional retracement back toward the red averages before initiating a new long (short) position. Once in a position, you can use the shortest red average (the one closest to the blue set) as a very efficient, no-nonsense trailing stop. This is not necessarily how Guppy trades with this tool, but it is a valid approach that you may wish to further investigate.

Right now, the wide spreads in both sets of moving averages are confirming the existence of a mammoth uptrend -- it's an incredible trend move, and with another week and a half of trading till year end, for all we know it may move even higher as the year-end bullish seasonal factor helps draw more cash into all of the major US stock indexes.

If you glance at the lower portion of the chart, however, you'll see that the long-term Chaikin money flow indicator (CMF)(100) is at a significantly lower level than it was at April 2010's high (right before it lost 50% of its value in 10 weeks -- remember, TNA is one wild stock!) and may be warning that the party may be just about over for this massive TNA moonshot. Essentially, some of the more informed holders of TNA have been selling into this massive up move (the smart money), unwilling to risk hard-won profits on the next correction to lower price levels. This behavior is known as "distribution," where the smart money sells their long positions even as less-informed latecomers continue to buy in hopes of riding the trend to still higher levels. Ultimately, the selling pressure of the "distributors" overcomes the buying pressure of the "acquirers" and the stock (futures contract) begins to retrace a portion of the previous gains, hopefully finding even more eager buyers near major support levels. And so it goes, on and on in an endless cycle that continuously drive stock and commodity prices up, down, and sideways -- sometimes in ways that defy logic and traditional chart reading techniques.

The big idea here is this: If you're long anything in the Russell 2000 index group (RUT, TF, TNA, or IWM), be sure to monitor your positions daily, because when the inevitable correction comes (and it will come, count on it), you want to be able to get out before too much damage is done to your long positions. In this example, look for the lower red moving averages to perhaps provide some support if a sizable reversal appears. If those averages are broken and then the blue averages drop below and then back up toward the red averages, you may want to drill down to your 30- to 60-minute charts to begin locating suitable low-risk short-selling opportunities.

With TNA always on the move, there always seems to be a way to play it, no matter what style of trading you most favor.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title:	Writer, market consultant
Company:	Linear Trading Systems LLC
	Jacksonville, FL 32217
Phone # for sales:	904-239-9564
E-mail address:	lineartradingsys@gmail.com
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TNA Uptrend Close To Terminal Phase?

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