DXD

[AussieTrader]

DXD

Profile:

UltraShort Dow30 ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones Industrial AverageSM Index.

Trading Idea:

We already have exposure to downside price action in the form of QID (which is the inverse of the Nasdaq 100). As I discussed in the weekends Market and strategy update we foresee more selling. So by adding DXD which targets the DOW30; we increase our position to the short side, but at the same time focus on a different mix of sectors / capitalization. The DOW30 sort of represents the health of the American corporation. The use of the inverse ETF again gives us exposure to this weakness and understanding not all our subscribers can sell short. So we can use DXD to profit from weakness without having to sell short.

Technical Analysis:

DJIAA is setting up a downside continuation pattern here as it tests the 11,000 level. I instigated a position this morning as the futures were up very strongly (in response to FRE / FNM news in the main) and took the opportunity to get a nice entry price. An often characteristic of bear markets are strong market opens followed by weak market closes. In essence we were 'selling' into short term strength. If and when 11,000 breaks to the downside then the next logical support area would be the June 2006 lows around 10,700

The DXD chart (which will look like the inverse of DJIAA) is in breakout mode. For the trade management, we will analyze DJIAA first and then apply stop / target analysis to DXD.

We will look to introduce a stop in the next update.

Fundamentals:

For a list of the component companies of the DOW30 (DJIAA) take a look at the attached link:

http://money.cnn.com/data/dow30/

For ProShares and UltraShort information (the ETF provider) see the attached link:

http://www.proshares.com/abtfunds

Trading Plan:
Buy DXD at or around the open

[AussieTrader]

Update:

Markets opened weak. DJIA traded below the 11,000 level then spent most of the day making hard work of recovering back up to yesterdays close area only to sell off again into the close finishing below 11,000. All that action basically signals that there is a good old bull / bear fight around this point.

The thesis of our DXD trade is that bears will win this fight and the DJIA will continue its downward trend.

Last night the SEC announced somewhat 'reactionary' measures to attempt to curb short selling which they state is contributing greatly to the demise of certain financial institutions. This is an interesting action and one without precedent, I am not sure of its value and I attribute the terrible situation financials find themselves in more to their greed and bad practice in the subprime mess rather than attempt to lay blame on a hidden army of anti American short sellers. Here is a link to that item;

http://online.wsj.com/article/SB121614248005255151.html?mod=djemalertNEWS

I'll introduce a stop today which will sit at $62.90 on the DXD. This equates to 11,500 area on DJIAA which is the June 27th high, I don't see that being breached anytime soon.

Trading Plan:

HOLD DXD with STOP at $62.90

[AussieTrader]

Update

If you have read the QID update, then you don't need to read the DXD update. The comments for both being from a market perspective are the same. If you haven't read the QID update, then please read on

A good day for the markets as many stocks participated in the rally. The DJIA after closing below 1100 (just) Tuesday bolted out the gate Wednesday. INTC posted good sales results and gave positive guidance other semi players ALTR, XLNX also had relative positive outlooks. Financials got a bounce due to the SEC announcement to target naked short selling, oil going down gave all a reason to go up some.

So, could these past few days signal a bottom? Or are we just seeing a short term bear market rally (fast and furious) before failing at resistance.

Who knows? No one really, but we can all participate in the analysis, conversations and investigations. Our overall sentiment is positioned for continued downside action, but as you will see from the portfolio we do not have huge exposure to this thesis (likewise to the upside thesis).

Right now the market action very much favours nimble day trading get in on some intraday strength and grab x% profit before it snaps back again. Yesterday I was just about to start a position in either FRE or FNM, but I decided against due to the risk control of holding those plays overnight.

WIth the DXD trade our stop is positioned such that if it were hit you woud be looking at decent bullish follow through more worthy of longer term sentiment change.

For now we will keep the stop in place.

Trade Plan:

HOLD DXD with STOP at $62.90

[AussieTrader]

The DJIA continued its relative strength today and we are stopped out at $62.90

[eggman11]

Hi Aussie,

I have noticed that there is a big disconnect among DXD and other "Ultra Proshares" ETFs that attempte to make 2X the market move. For instance, I noticed that DXD is currently trading now at down .51%, when the Dow Jones itself is trading down approximately .09%, I don't understand how that can be shoildn't the DXD be trading up about .18%> Please explain, because it doesn't look like these Ultra ETFs are good buys at all. It is similar difference in the QID as well. The movement doesn't even equal the same percentage move as the index it is tracking let alone 2X the index move.

Thanks

[AussieTrader]

Hi Aussie,

I have noticed that there is a big disconnect among DXD and other "Ultra Proshares" ETFs that attempte to make 2X the market move. For instance, I noticed that DXD is currently trading now at down .51%, when the Dow Jones itself is trading down approximately .09%, I don't understand how that can be shoildn't the DXD be trading up about .18%> Please explain, because it doesn't look like these Ultra ETFs are good buys at all. It is similar difference in the QID as well. The movement doesn't even equal the same percentage move as the index it is tracking let alone 2X the index move.

Thanks

Hey Eggman,

Yes you are right to have noted this. The ETF product does not correlate the movement of the index 100% all the time.

Over time variances occur in which are a result of some complex criteria to do with how the ETF fund is calculated. The main contributors to the variance seen are increased volatility in the underlying index (which we have seen these past few days in DJIA) and the effect of compounding in the ETF value. This variance applies to all types of ETF products.

A more fuller description of this can be read at the ProShares website below;

http://www.proshares.com/funds/performance/UnderstandingProSharesLongTermPerformance.html

This is one of the reasons why when analysing our ETF position we use the underlying Index first and then the ETF chart second. By doing this we can try to ensure when looking at stops or targets we take possible variance into account (as much as we are able to as it is not a known item it changes relative to on-going price action). The DXD stop was placed outside a zone which if breached signalled a real possibility of upside continuation in the DJIAA, whilst also taking into account possible variance.

I hope this will help explain the situation for you. ETFs are a very powerful tool at a traders disposal, and with anything the more knowledge we have of exactly how things work the better we can be at using them.

We are out DXD which is a shame, but the DJIA rebound from the lows was very powerful and compelling.