ETF of the Week: Return of the FAZ

It was only a month ago that the triple-leveraged ETF, the Direxion Financial Bear 3x Shares (NYSE: FAZ) earned a series of major upgrades that allowed traders and active investors to take advantage of a very short-term sell-off in the financials.

Inverse leveraged ETFs like FAZ give active investors the opportunity to trade the profit-taking that takes place during exceptionally overbought markets. Being both inverse and leveraged makes these funds especially sensitive to the sort of extreme conditions that take place when markets go on one-way moves, closing day after day after day in the same direction.

Here the Direxion Financial Bear 3x Shares earned a “consider buying” rating of 9 out of 10 after finishing lower for three out of the previous five sessions. This was the initial signal that the fund had pulled back to levels at which traders historically have been more inclined to buy than sell in the short-term.

FAZ chart

I showed a strategy for taking advantage of this kind of significant ratings upgrade two weeks ago, when FAZ last earned a major ratings upgrade. This time, a similar strategy of scaling in on the initial upgrade to 9 and building to a full position on a lower close and/or ratings upgrade, is shown to be an effective way of taking advantage of short-term weakness even in markets that seem like they will never pull back. A dynamic exit strategy using the 5-day moving average or the 2-period RSI both work well to help ensure that traders are selling positions into strength.

To learn more about trading exchange-traded funds using scale-in strategies like these, click here.

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