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Roller-Coaster Thrills With Triple-Leveraged Small-Cap ETFs

10/30/09 10:04:06 AM
by Donald W. Pendergast, Jr.

If you can handle the volatility, consider taking the Direxion Small Cap Bull 3x Shares ETF for a ride through the small-cap markets.

Security:   TNA
Position:   N/A

Most traders have enough problems attempting to profit from the swings in nonleveraged stock index exchange traded funds (ETFs), but for those with a solid handle on their timing and risk control parameters, hefty gains can be the order of the day. The Direxion Small Cap Bull 3x Shares ETF (TNA) is the venue of choice for stock index traders seeking three times the daily performance of the Russell 2000, and this particular ETF has had a wild ride over the past month or so. Let's look at its recent price action and see if we can't make an educated guess or two about the most likely trajectory for this small-cap rocket to assume in the next few weeks.

FIGURE 1: TNA, WEEKLY. Easy as A-B-C — or not? While anything can happen in the stock market, the typical course of action after such a sharp thrust lower is that a minor rebound swing could occur before bearish forces reexert control.
Graphic provided by: MetaStock.
Graphic provided by: WB Detrend EOD from ProfitTrader for MetaStock.
TNA certainly does live up to its "3x the performance" (up and down) of the Russell 2000 index; since making the last swing high on October 19, 2009, this ETF fell by as much as 26.12% as of October 28, 2009. Prices appear to have bottomed out for the time being, but the severity of the recent downswing is such that traders should prepare for a relatively minor bounce, perhaps up to $42 to $43 before the downdraft takes control again.

There are a few reasons to believe that Wednesday's panic low was indeed a temporary low; first of all, the detrend oscillator had exceeded all its previous low readings made since June 2009, the 89-period simple moving average (red line on Figure 1) and the 200-period exponential moving average (not shown) were both in the area of $38 to $36 and the Fibonacci 127% extension was at about $36.40. Taken as a whole, that jumble of seemingly unrelated numbers, when put up against the context of an overextended detrend oscillator, provided wise technicians with a reasonably accurate price level for TNA to finally bottom out. Of course, you can't actually call it a bottom unless the subsequent price action produces a reversal bar, and that won't occur until we see a close in TNA above $41.51 (October 28's high).

In many cases when a stock, commodity, or ETF makes such a strong thrust down, one that confirms a trend reversal (TNA is now in a daily downtrend, based on the basic "lower high, lower low" method of trend analysis), a minor rebound move normally follows before the original downward move resumes. Of course, it's just the usual A-B-C corrective wave pattern that every swing trader and Elliottician is familiar with. In TNA's case, the appearance of a valid A-B-C corrective wave could prove interesting -- and potentially profitable -- for patient bulls. That's because TNA and the index it's derived from (the R2K) are both due to make major weekly cycle lows sometime during the latter half of November 2009. If we see a verifiable C wave down after the soon-to-be-expected B up wave plays out, look for telltale signs of a major reversal if the C wave down starts to manifest signs of bullish price-momentum divergence (using the moving average convergence/divergence [MACD] or detrend oscillator) and also begins to display signs of lower volatility (using an average true range [ATR] 10 indicator). Then just wait for a simple daily based buy signal, which could be something as simple as a Gann swing line breakout (a break above the three-period simple moving average of the daily highs) or a stochRSI(10) cross back up above its lower signal line. Boom! You're back in the bull market business again.

Super-sharp traders might also try to catch the descending C wave should it appear as anticipated, but be aware that trading a triple-leveraged ETF on the short side might be about as much fun as trying to catch a bolt of greased lightning on steroids while stumbling along on misaligned roller skates in the dark.

In other words, it ain't recommended. But it might be a great thrill ride someday at Disneyland.

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:

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Date: 11/01/09Rank: 3Comment: 

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