Before we look at tonight’s charts I would like to take a minute to discuss trading the three X leveraged ETF’s. Leveraged ETFs aren’t for everyone as they can be very volatile. These instruments are for those that can take a bigger risk and still come out OK when they go against you. For the average investor, a 1 X leveraged ETF is all they can handle and that should be fine. When you start playing with the 2 X and 3 X leveraged ETF’s your risk factor goes up very fast.
Placing a sell/stop in the correct place works great for the 1 X leveraged ETF, but when you are in a 3 X leveraged ETF setting the sell/stop is a totally different game. Very rarely do I let the original sell/stop be hit before I will exit the trade as you have to give the stock some wiggle room when you first take a position. As more information becomes available you can start to make adjustments to your sell/stop mentally. A 3 X ETF can get away from you in a heartbeat so one has to pay very close attention at all times.
With the 3 X Kamikaze stocks, the leverage can be very high and can knock you out of a decent trade before it has time to start working in your favor. There is no worse feeling than waking up in the morning and seeing one of your Kamikaze stocks trading down15% or more before you can do anything about it. This is why we call them Kamikaze stocks.
Always keep in mind that leverage can cut both ways. During that two-year bull run in the stock markets from 2016 to January of this year, we had as many as 35 stocks at one time with many being 3 X leveraged positions. Once you can get ahead on your positions you can then move your sell/stop accordingly. As I’m more of an intermediate-term trader I like to use the 30-week ema as my sell/stop as it usually gives the stock enough room to breathe. Again, leveraged stocks are not for everyone so please keep that in mind the next time you are deciding where or not to take on the leverage.
Tonight I would like to start out by looking at the HUI and show you why I decided to exit all my Kamikaze stocks today. The Kamikaze stocks are similar to options that decrease in value over time, but not to the extreme an option can lose value. It’s more of a slow decay in price, but after a fair amount of time, you can begin to see the decay working against you which is why you try to time your purchases during an impulse move. Even then when a consolidation pattern starts to build out time is eroding your Kamikaze stock.
Below is one of the weekly charts we’ve been following which shows the parallel 2016 downtrend channel. In the center of the downtrend channel, you can see the blue 7 point falling wedge reversal pattern. It’s a reversal pattern because it formed above the December 2016 low. The blue arrows measure the price objective which was down to the 119 area. The actual low came in at 131which was about 12 points higher than the price objective which could be close enough to call it done. Also, you can see the black dashed horizontal line that is taken from the double bottom hump made back in 2015 which led to that impulse move up to the August 2016 high. Note how the HUI has been trading around the double bottom hump trendline around the 139 area making little progress.
