Energy Bear ETFs Surge as Oil Prices Plummet

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Oil prices joined other risk-on assets in a second session of heavy selling Tuesday. The commodity plunged 3% to back up its 4% Monday slide as investors remain on edge that the growing number of coronavirus cases outside China and Asia could hurt global demand. Reported increases of the disease in Iran, Italy, and South Korea have renewed fears of slowing economic growth and sparked concerns that the disease could become an international pandemic.

“We should not underestimate the economic disruption, as a super spreader could trigger a massive drop in business activity around the globe of proportions the world has never dealt with before,” AxiCorp chief strategist Stephen Innes wrote in a note, cited by Reuters.

Energy inverse exchange-traded funds (ETFs) – which rise when energy markets fall – have soared over the past two days amid the oil and gas price rout. Below, we outline three of these funds and discuss possible trading tactics to profit from ongoing weakness in both commodities.

Direxion Daily Energy Bear 3X Shares (ERY)

The Direxion Daily Energy Bear 3X Shares (ERY) has an investment objective to return three times the inverse daily performance of the Energy Select Sector Index. Industry bellwethers Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX) account for about 30% of the tracked benchmark, making the fund suitable for those who want a geared bet against those names. Tight bid/ask spreads and daily turnover of 265,000 shares make the fund a traders’ favorite among the segment. ERY controls net assets of $33.38 million, charges a 1.09% management fee, and has climbed 52.09% since the start of the year as of Feb. 26, 2020.

After several weeks of consolidation, ERY shares broke to the upside on above-average volume Monday and continued higher yesterday. Those who want to ride the bullish momentum should look for a move to the late December 2018 high at around the $80 level. Think about placing a stop-loss order either at the mid-way point of yesterday’s wide-ranging candlestick or below the session low at $59.08, depending on personal risk preference.

ProShares UltraShort Oil & Gas ETF (DUG)

With a $17.71 million asset base, the ProShares UltraShort Oil & Gas ETF (DUG) seeks to return two times the inverse daily performance of the Dow Jones U.S. Oil & Gas Index. The fund effectively provides a cost-effective option for taking a short-term leveraged bet against a market-cap-weighted index of large U.S. oil and gas companies. Ample liquidity and an average three-cent spread allow traders to enter and exit positions easily with minimum slippage. As of Feb. 26, 2020, the ETF yields 0.44% and has advanced 35.04% year to date.

DUG shares surged nearly 10% yesterday to set a 52-week high at $56.65, invalidating a “death cross” signal generated in early January in the process. Those who buy the ETF should consider letting the market close out the trade by using a 10-day simple moving average (SMA) as a trailing stop. For instance, exit any open positions when the fund’s price closes below the green line on the chart.

ProShares UltraShort Bloomberg Crude Oil (SCO)

The ProShares UltraShort Bloomberg Crude Oil (SCO) aims to deliver two times the inverse daily performance of the Bloomberg WTI Crude Oil Subindex. To achieve its objective, the 12-year-old fund invests its $75.35 million asset pool in futures and options contracts for light sweet crude oil, making it a handy instrument for oil bears who want a straightforward bet against the commodity. Although the ETF’s 0.95% management fee isn’t cheap, it’s less of a consideration given the fund’s short-term tactical mission. More importantly, a narrow 0.08% spread coupled with an average daily volume of roughly $30 million keep transaction costs reasonable. As of Feb. 26, 2020, SCO has risen nearly 40% on the year on the back of tumbling oil prices.

The SCO share price rallied sharply in January to end a 12-month downtrend. After a minor pullback over the past few weeks, the ETF closed above the 200-day SMA and the top trendline of a flag pattern Monday before rallying sharply again yesterday – a move that may act as a catalyst for further short- to mid-term buying. Those who anticipate the strong gains to continue should set a take-profit order in the vicinity of a horizontal resistance line at $22. Cut losses if the fund’s price falls below the 200-day SMA.

Source: Investopedia

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