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