If You Really Want to Trade Crude Oil Aggressively try DXO and DTO
Warning – this post is not for the faint trading heart! A few readers have asked alternate methods to trade crude oil price moves and I’ve generally suggested the USO fund and a few others, but if you have some experience under your belt and want to take the most advantage of your directional bias, why not try two relatively new double-leveraged ETFs (actually ‘exchange traded notes’): DXO and DTO.
The DXO is an ETF that is double-leveraged Long Crude Oil (prices);
The DTO is an ETF that is double-leveraged Short Crude Oil (prices).
Since inception mid-2008, the Double-Leveraged Long fund DXO has fallen 90% from a peak of $26.00 to a low of $2.43 earlier this month – I told you trading these leveraged ETFs was not for the weaker players out there! However, the 2x short fund DTO rose 700% from $20 to a peak of $140 also early in December – a move that occurred virtually straight up as crude oil prices fell almost straight down.
Let’s take a look at these two ETFs and determine whether or not you would like to add them to your developing trading arsenal.
DXO: Double-Leveraged Long Crude Oil:
Just like crude oil prices, we see a multi-swing positive momentum divergence and a similar volume surge as we’re seeing in USO (and other oil related ETFs as well). The thinking has to be “there’s no way price could go any lower so let’s pour in to these funds like there’s no tomorrow.” Still, be careful – just because something is cheap is no reason to buy it – but as I’ve said plenty of times before, there are additional reasons to be bullish crude oil short term (the positive divergence, the supposed ’rounded reversal’ or saucer bottom pattern, the long-term support at $40 per barrel, etc).
The purpose of this post is more to introduce you to these relatively new funds rather than give my take on crude oil at the moment, and I encourage you to do your own analysis on this topic.
While the double-long fund has taken a beating since inception, the double-short fund has rallied and rewarded strong-stomached investors with immense profits.
DTO: Double-Leveraged Short Crude Oil:
Wouldn’t it be nice if we could find more stable uptrends like this one in the current environment? Well, actually you can… through inverse ETFs (and the US Dollar Index).
Now might not be the most opportune time to begin trading such vehicles aggressively, but you need to know that the possibility is out there if you so desire and have the skills and discipline to do so.
After bouncing off the rising 20 day EMA two times previously, price is making another support test of this level today after filling a deep down-gap this morning. The question is – will support hold?
The opposite volume pattern is occurring in DTO in terms of volume trailing off and decreasing as price has reached higher and higher levels – in a stock, that would signal a strong non-confirmation and would be immensely bearish. Let’s see how it plays out (probably similarly) in this new ETF.
Of course, I wouldn’t be objective if I didn’t point out alternate ways to play crude oil outside of the futures contract.
Here’s an article from Gary Gordon, the ETF Expert: Crude Oil ETFs… Double Down, Double Up.
In addition to the DXO and DTO, Gary mentions the OLO (Regular exposure Long) and SZO (Regular exposure Short). He also notes: “These are not meant for buying-n-holding; rather, they are meant for making a calculated bet and exiting when you’ve reached your profit target or stop-loss.”
Please pay attention to his last sentence in the article:
“Stay vigilant… use stop-loss protection.”
Corey Rosenbloom
Afraid to Trade.com
too late to the game
Is there a price target you have in mind for oil futures?
The USD Index hit $82 today and crude hit resistance at $50 and swiftly pulled down. Will we see it get over $50 in your opinion?
Thanks, and keep up the great charting
Hi, Corey:
Would you please comment on the sharp rise of the major indexes in a matter of minutes? Thanks.
J
Anon,
Depends on what you mean. With inverse and normal funds, it’s never too late. The collapse of one trend is the birth of another.
Aly,
Ultimately, I’m bullish but I don’t forecast targets usually. The way I play the game is analyzing the current information and trying to project only the next probable swing and set targets for that swing only. It’s far easier than making long-term projections and then having new information change your forecast.
Ultimately, I believed when price hit $40 that the next likely swing was up and was able to trade that bias. I ultimately think we’ll break above the averages and get some sort of decent counter-trend reversal, but in tactical trading, the average is often a price target which allows you to exit and see what happens as price tests this average.
So, yes, I see crude above $50 soon but also recognize that the $50 level provides resistance. Perhaps we get a swing back down that doesn’t violate $40 and then on the next swing up, we break through those levels, but we haven’t done so yet at least.
Thanks Aly
J,
I added a little blurb in today’s Intraday Trading post. I don’t know the reason, but suspect it has to do either with optimism on the “Big 3 Auto” bailout, market happiness that the Fed will be cutting rates this week, or funds not wanting to hold short positions ahead of the Fed meeting – probably a combo of all the above. Or from a technical (non-news) perspective, the day was oversold on a triple positive momentum divergence.
My guess is that it’s some sort of combo of these possibilities but we often never know the real cause of market moves until they’re well over… usually right as the news comes out.