The End of DXO – Double Leveraged Long Crude Oil

Sep 2, 2009: 3:56 PM CST

I can’t say I’m entirely surprised by the announcement today (via Yahoo Finance) that Deutsche Bank will end the Double-Leveraged Crude Oil ETN under symbol DXO.  The full story is tantalizingly entitled, “ETN Shutdown Won’t Be the Last.”  Be sure to read the full story by Don Dion (from TheStreet.com).

For a little nostalgia, let’s take a final look on the blog at the chart of DXO:

There’s no point in doing standard or classic technical analysis on this chart, but note that the fund – in price – closely resembled that of Crude Oil as expected, only the percentage moves were enhanced or “juiced.”

Today’s action would have been a nice sell signal on any given day, in that price broke trendline support and the 50 day EMA.

It’s too bad – DXO was tracing out a very ideal Elliott Wave pattern, complete with nice fractal divisions of waves, putting us currently in a sell-signal potential corrective phase down.

The same chart – with the exception of DXO’s 7% plunge today – is applicable to crude oil.

Here are a few key quotes from Don’s article:

“Since ETFs and ETNs are designed to track an underlying index, issuers create new shares as more investors pour into the fund. The creation process helps to keep these funds in line with their underlying values. By halting creation and essentially turning the ETFs and ETNs into closed-end funds, issuers can doom funds to trade at extreme premiums and discounts to their underlying value.”

“Because of its unique structure, DXO has been threatened from more than one proposed regulatory action. Since DXO tracks futures contracts, it first faces limitations from the CFTC. DXO is a leveraged fund, making it part of a second group of exchange-traded products that have come under fire.”

“DXO’s methodology seems to have been in the wrong place at the wrong time. In yesterday’s announcement, however, Deutsche Bank was careful to note that no other ETNs would be affected by the announcement.”

“While these strategies can be dangerous in the hands of the wrong investor, they are useful tools for hedging when employed properly.”

For a round-up of prior blog posts and market calls I’ve written on DXO, see the following list below or use the blog’s search function:

“If You Really Want to Trade Crude Oil Aggressively, Trade DXO and DTO”

“Volume Surging in USO and DXO Oil Funds”

“Double Long Crude Oil DXO” (Chris Perruna.com)

“FAZ 3x Financial Bear Fund Crushed (with discussion on DXO)”

Finally, a closing quote from the above “Bear Fund Crushed” post:

“The same logic applies to those thinking DXO – double-long crude oil – is going to regain its mid-2008 price highs of $28 any time soon.  DXO currently trades around $2.00.  Using linear logic (again, only for simplicity), for DXO to move from $2.00 back to $28.00 would be a 1400% move which would imply a 700% rise in Crude Oil.

To drive the point home, if you think DXO is going to get back soon to $28.00, then Crude Oil – which trades at $50.00, is going to have to move up 700% which would take price to $350 per barrel.  Do you think that’s going to happen anytime soon?

Don’t fall victim to this “trader’s trap” in these leveraged funds!”

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

6 Comments

6 Responses to “The End of DXO – Double Leveraged Long Crude Oil”

  1. pgibbns Says:

    I am trying to figure out the implication of DB closing out their Hedge. Could it cause a significant drop in Oil Futures?

  2. Dan de Man Says:

    Looks like you Yanks will have to get a Canadian Margin account to trade Horizon Beta Pro 2x ETFs Your laws don't apply to us. :o)

  3. kkerr Says:

    It might be worth noting (but not necessarily the case for DXO) that due to the large changes in prices of leveraged ETFs, that volume comparisons from days or periods far apart can be tricky. FAS and FAZ are good examples. FAS is almost 6 times higher than its low, and FAZ has dropped from roughly 1000 to 27.

    As for DXO, it has dropped over 80% since inception due to the underlying index dropping roughly 50%. The downward compounding was what pushed DXO to $2. An interesting tidbit is that of the 80% drop, 30% is due to decay (volatility causes leveraged ETFs to decay, which everyone should know by now).

  4. Dan de Man Says:

    Looks like you Yanks will have to get a Canadian Margin account to trade Horizon Beta Pro 2x ETFs Your laws don't apply to us. :o)

  5. KKerr Says:

    It might be worth noting (but not necessarily the case for DXO) that due to the large changes in prices of leveraged ETFs, that volume comparisons from days or periods far apart can be tricky. FAS and FAZ are good examples. FAS is almost 6 times higher than its low, and FAZ has dropped from roughly 1000 to 27.

    As for DXO, it has dropped over 80% since inception due to the underlying index dropping roughly 50%. The downward compounding was what pushed DXO to $2. An interesting tidbit is that of the 80% drop, 30% is due to decay (volatility causes leveraged ETFs to decay, which everyone should know by now).

  6. Quantum Fading » Weekly Leveraged ETF News 8 Says:

    […] 9/2/2009 – FINRA Fires Next Shot in War Against Leveraged ETFs (SeekingAlpha) 9/2/2009 – The End of DXO – Double Leveraged Long Crude Oil (AfraidToTrade.com) Categories: News Tags: News Comments (0) Leave a […]