3 Leveraged ETFs to Trade a Stock Market Correction

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There’s no doubt about it – the stock market has been on a tear for more than a decade. Therefore, positioning for a correction is certainly a play for hardened contrarians. However, with coronavirus continuing to cast a shadow over global economic growth, the illness may be just the excuse the market needs for a healthy pullback.

Indeed, just this week, Apple Inc. (AAPL) told investors that its first quarter sales will be lower than initially expected due to the virus outbreak slowing or halting the delivery of its required supplies from China. The surprise announcement from the iPhone maker prompted investment bank Goldman Sachs to warn of a near-term correction, with the bank concerned that earnings expectations could be overly optimistic, especially given the exposure of global companies to the Chinese economy.

Those seeking short exposure to the market should consider trading the three leveraged exchange-traded funds (ETFs) presented below. Let’s go over the metrics of each fund and discuss possible trading tactics.

Direxion Daily S&P 500 Bear 3X Shares (SPXS)

With assets under management (AUM) of $536.52 million, the Direxion Daily S&P 500 Bear 3X Shares (SPXS) aims to provide three times the inverse daily performance of the S&P 500 Index – a cap-weighted basket of 500 of the largest U.S. companies. The fund allows traders to bet against large-cap firms with significant Chinese revenue exposure, such as Apple, Skyworks Solutions, Inc. (SWKS), and Wynn Resorts, Limited (WYNN). As of Feb. 21, 2020, SPXS offers a 1.74% dividend yield and has fallen nearly 15% since the start of the year.

Since August, SPXS shares have traded within a narrow falling wedge – a chart pattern that typically breaks to the upside. Also, as the price continues to make new lows this month, the relative strength index (RSI) has made higher lows to form a bullish divergence, indicating slowing seller momentum. Those who trade the fund should set a take-profit order near $16.50, where price may run into resistance from the September swing low and falling 200-day simple moving average (SMA). Protect capital with a stop positioned under the February low at $11.30.

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ProShares UltraPro Short QQQ (SQQQ)

Created in 2010, the ProShares UltraPro Short QQQ (SQQQ) seeks to return three times the inverse daily performance of the NASDAQ 100 Index. The fund particularly suits those who want short exposure to leading technology stocks, given that the tech sector makes up about 60% of the tracked benchmark. A tight penny spread and average volume of almost 17 million shares allow traders to capitalize on intraday moves while keeping transaction costs in check. SQQQ charges a 0.95% management fee, controls $1.16 billion in net assets, and has slumped just shy of 30% on the year as of Feb. 21, 2020.

Like SPXS, SQQQ has remained entrenched within a falling wedge over the past seven months as technology stocks have surged higher, despite growing concerns about lofty valuations. Nonetheless, buyers returned to the fund yesterday, pushing price off the pattern’s lower trendline on some of the highest trading volumes this year. Those who enter at current levels should book profits on a test of major overhead resistance at the $30 area. Manage risk by setting a stop-loss order beneath recent lows around $16 and moving it to the breakeven point if price rises above the 50-day SMA.

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VelocityShares Daily 2x VIX Short-Term ETN (TVIX)

The VelocityShares Daily 2x VIX Short-Term ETN (TVIX) is designed to return two times the daily performance of the S&P 500 VIX Short-Term Futures index. The benchmark comprises first- and second-month VIX futures positions, equaling a weighted average maturity of one month. Traders can use the ETF to effectively short the stock market, as the VIX generally moves in the opposite direction to the S&P 500. Bear in mind that the fund’s issuer, Credit Suisse Group AG (CS), may decide to halt creations if it cannot hedge its position. As of Feb. 21, 2020, TVIX has AUM of $879.24 million and is trading down 23.52% year to date.

After 12 months of steady declines, TVIX shares appear to be forming a possible double bottom. This month’s low has found support near January’s trough, while a bullish divergence between price and the RSI further indicates shifting market dynamics. Traders who buy the fund should target a move to $127 but exit quickly if price breaks down below the 2020 low at $38.33.

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Source: Investopedia

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