Shhhhhhhhhhhhh!!! I am about to let you, dear reader, in on a deep, little secret that the average trader has no clue about, in my opinion. I am referring to the outsized gains that can be made by playing the levered ETFs and ETNs (which I will refer to as ETFs in the rest of this blog). These ETFs trade at 2x or 3x the daily move in some under-lying index, like the S&P 500, or technology stocks, or small caps, or in certain sectors like precious metals or commodities like natural gas or oil.
Now, it’s no secret to most traders that the levered ETFs can produce
big gains quickly if one can get the directional call correct….and there-in lies the rub! How does one get the directional call right? If you are off by even a day or two on that directional call, or if the directional move loses momentum too quickly, it can choke off a potential nice winner. On the other hand, if you get the entry and exit points correct, you have the chance to watch the ETF rally by double digit percentage gains very quickly over a few days time…and if you like to increase your return (and risk), you can sometimes find liquid options markets on some of these levered ETFs.
So, how does one find the right moment to jump on these plays? Well, consider this strategy I recently deployed on the Direxion Gold Miner ETF under symbol NUGT.
On October 14th, a trader on the Ace Talking Stocks Forum asked my opinion of NUGT, and I responded with these comments:
might be worth a flyer to go long NUGT now…the fast RSIs are deeply
oversold and this suggests the downside risk is low and the upside gains
could be large….in fact, the last two times that NUGT rose out of the
oversold fast RSIs and a trader rode it up to the overbought side of the FAST RSIs, they would have gained from $40 to $50 a share in each of
those situations! (CCI, a more traditional measure for commodity like
stocks had similar results)….
Of course, NUGT is very
speculative and it moves very fast, but my hunch is that NOW is about
the time to take a long position, but don’t bet more than one can afford
to lose. Since NUGT moves very fast, don’t take it that I expect NUGT
to be higher tomorrow…one has to be ready to ride the short term
volatility, but what I see here is that if one can stay patient, they
might find themselves with gains of $40 or more a share within the next
Indeed, I liked the set-up so well, that I plunked my own money on some NUGT shares the next day….I have not traded this one much, and because I had other positions in gold, I decided to keep my bet small at 50 shares.
Here’s what I said the next day on the Ace Talking Stocks Forum:
am banking on a sizable run the next 2 or 3 sessions…go ahead and
pick your oscillator, and so long as ADX is not running a strong trend
in bull or bear direction (it’s not), then let the oscillators make your
Right now, the Stochastics shows a little movement
higher but it’s almost imperceptible on the chart…I prefer my FAST
RSIs because it teases out the early move more easily than does
Stochastics, but to each their own, and as in either case, if you react,
you can make big gains on levered stocks like NUGT (or DUST) or any others such as the volatility products (VXX, TVIX, etc)….
bought NUGT this morning right after the open….50 shares at
$37.95….if they pop $20 on this run-up over the next few days, that’s a
fast $1,000 gain for me…or if they go even higher, that’s gravy and
for not a lot of risk of capital.
A week later (I held a little longer than I expected since the trade remained strong), I took profits on my 50 NUGT shares at $54.59 for over $800 in profits on that small trade. In addition, I cashed out a couple other big gainers that day on FXE calls (euro long) and a small cap stock (AXDX). Though I cashed out after about an $18 gain, NUGT actually did make it almost to $60 on this rally, which meant it did beat the $20 gain I had expected (but I wasn’t greedy–I just took the easy profits without much risk.)
The point here is to pay attention closely to the Fast RSIs (an Ace exclusive and explained in my blog elsewhere) or use closed-range oscillators like Stochastics or RSI if you like when the trend is weak. Or you can also enhance your returns when the trend is strong if you bet the way of the trend….the point is not to play the oscillators when betting against a strong trend. Trend is easily found by the ADX graph or the MACD graph. Be sure you understand trend before trying out this trading strategy!
For my money, the potential for out-sized returns on the levered ETFs if played properly, can be very rewarding.
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