Using Ultra ETFs as a Stock Substitute
Let's face it. As traders, all
of us at one time or another has spotted a sector roaring higher-and then bought
the only stock in that sector that decided to sleep through the entire party.
Or, we decide technology stocks are a great place to be, and we scoop of shares
of Apple, Inc. (AAPL | news | PowerRating | PR Charts ), Research in Motion, Ltd. (RIMM | news | PowerRating | PR Charts ) and Bidu.com, Inc. (BIDU | news | PowerRating | PR Charts ).
That might be the day that an analyst decides that BIDU is too pricey . . .
and downgrades it . . . thus sending shares of the Chinese Internet stock
lower.
An easy solution-especially if
you don't feel like researching additional tech stocks--is to fire BIDU and
replace it with shares of the tech-heavy Ultra QQQ (QLD | news | PowerRating | PR Charts ). As long as the NASDAQ
100 index is moving higher, the QLD should be able to keep up with-or even
outpace-your other tech holdings.
In the chart below, you see a 5-minute intraday
chart of the QLD and BIDU. The QLD is plotted showing candlesticks; BIDU is
represented by a line (closing price of each bar). The volume shown belongs to
the QLD.) Notice how, on a day when the QLD drifted higher until early
afternoon, BIDU slid south. Midday, both the QLD and BIDU fell, executing a nice
head fake (and no doubt stopping out a lot of traders). In the early afternoon,
though, the QLD shot higher, tracking the NASDAQ 100's climb. Poor BIDU could
barely climb off of its lows.
ProShares Ultra QQQ (QLD | news | PowerRating | PR Charts ) & Baidu.com, Inc. (BIDU | news | PowerRating | PR Charts ) 5-Minute Chart
RealTick
graphics used with permission of Townsend Analytics, Ltd. 1986-2008 Townsend
Analytics, Ltd.
The strategy on this
day--especially in the afternoon session-- was clear: keep BIDU to one side, and
let the QLD take its place.
Using Ultra ETFs for Short Term Plays
Currently, the market is taking
traders on the ultimate roller coaster ride. In this type of uncertain market
environment, I limit my trades to intraday time frames. Or, if I do hold an
overnight position, I hold it for one night, only.
Again, Ultra MarketCap ETFs
provide a great vehicle for popping in and out of volatile markets. As long as
you're on the right side of the trade, Ultras will hand you a double bang for
your buck.
On March 11th, the S&P 500 Index
gapped open to the upside, then drifted down all morning, trying to fill the
price gap. At about 1:30 p.m., however, the bulls took charge and the S&P flew
steadily higher, all the way to the closing bell.
The 5-minute chart shown below
shows the price action of the Ultra S&P500 (SSO | news | PowerRating | PR Charts ). Although I had no intention of
holding shares of this, or any other stock/ETF overnight in this market
environment, it was a clear shot to buy shares of the SSO when the S&P shot
higher, breaking above its downward drift. When the SSO's 10-period EMA
(exponential moving average) crossed above its 20 EMA and volume increased, I
took the buy signal (green arrow) and bought shares of the SSO at 64.
RealTick graphics used with permission of Townsend Analytics,
Ltd. 1986-2008 Townsend Analytics, Ltd.
The rest of the ride was easy,
as the SSO naturally moved higher with the S&P 500 for the remainder of the
afternoon. Just before the bell, we exited at 66.50. It was a dandy, stress-free
trade, and we took home 2.50 per share profit.
Please note: when trading any of
the Ultra MarketCap ETFs, be sure to watch the actual index -not the ETF-to
make entry and exit decisions. Especially because of their leveraged status
(which creates wide daily trading ranges), these ETFs can shoot up and down
very fast. So, be sure to use the correlating index, such as the Dow Jones
Industrial Average, S&P 500 index, NASDAQ 100 index, and so forth, as leading
indicators for the ETFs. For day trading purposes, you may want to use the
E-mini futures to act as your leading indicator.
Novices: please paper trade the
Ultras until you become comfortable with their sometimes volatile price action.
As you can see, when used wisely
and with caution, ProShares Ultra ETFs are a powerful trading tool that can help
boost your trading profits in both the short and long term.
In my next installment, we'll
continue our discussion of a different family of exchange traded funds. Until
then, keep green on your screen, and here's to your good wealth!
You can find more how-to and educational articles to improve your investing and trading each day on TradingMarkets.com.
Toni Turner is a trader and investor with seventeen years of experience in the financial markets. She is the best-selling author of A Beginner's Guide to Day Trading Online 2nd Edition, A Beginner's Guide to Short Term Trading and Short-Term Trading in the New Stock Market. Toni has appeared on NBC, MSNBC, CNN, and CNBC. She has been interviewed on dozens of radio programs and featured in periodicals such as Fortune magazine, Stocks and Commodities, SFO, MarketWatch, Fidelity Active Trader, and Bloomberg Personal Finance.
Toni is the President of TrendStar Group, Inc. For more information about her live and online seminars, as well as additional educational products, please go to
www.ToniTurner.com
