High Probability ETF Trading: Leveraged ETFs Rally into Strength (QLD, SSO, UPRO, SPY, SDS)

Strength in the first three trading days of the week meant higher prices for many stocks and exchange-traded funds (ETFs) that had been oversold in the days leading up to this week. Among these markets moving higher were a number of leveraged ETF markets – many of which moved into oversold territory a week ago.

As I have written several times before, leveraged ETFs can be a great addition to your high probability trading strategies with stocks and non-leveraged ETFs. Why? Because opportunities in leveraged ETFs, especially inverse leveraged ETFs, often come only after markets have reached truly historic extremes, high probability traders can often take advantage of set-ups in leveraged ETFs when set-ups in other markets are either no longer available or have already been pursued.

Typically, this takes place when markets make one-way moves to the upside or downside. When traders are waiting for pullbacks in order to take a position in during a bullish advance, it is often the case the inverse leveraged ETFs are becoming more and more oversold.

One example would be a situation in which the ^SPY^ was climbing day after day without pullback. At the same time, inverse leveraged ETFs like the ^SDS^ would likely be moving deeper and deeper into oversold territory. While the high probability trader may not have a play on a very overbought SPY trading above its 200-day moving average, that same trader may opt to take advantage of a very oversold SDS.

But opportunities in leveraged ETFs develop not just as a result of extended, one-way markets. As Larry Connors pointed out recently, markets this summer have tended to range from one extreme to the other (click here to read Larry’s article and likely explanation of why this is happening).

What this has meant, in part, is that many of the opportunities in leveraged and inverse leveraged ETFs that tend to occur mostly during extended market moves, are actually occurring more frequently right now.

Let’s take a quick look at some of these leveraged ETFs that have rallied from oversold extremes into strength over the past few days.


The ProShares Ultra QQQ Trust ETF closed in oversold territory on August 11th (note that oversold threshold for leveraged ETFs is significantly lower than that for non-leveraged ETFs). One day later, QLD closed lower, following-through to the downside and letting high probability traders take positions at even more oversold extremes.

QLD Chart

A day later, QLD closed even lower. Aggressive traders at this point added a second unit long in QLD.

Two days after that QLD rallied into strength, letting traders exit with gains of more than 2%.


A similar opportunity presented itself in SSO around the same time. Again, follow-through below the first oversold close allowed high probability traders to take positions in SSO on the 12th and 13th of August.

SSO Chart

Within two days, SSO had rallied into strength and was ready to be exited. The gain for aggressive traders here would have been approximately 2%.


Another leveraged ETF that high probability traders received alerts for last week was the ProShares UltraPro S&P 500 ETF.

UPRO Chart

As a tracking ETF for the S&P 500, the opportunity in UPRO was very similar to the one that appeared in the SSO: follow-through closes deeper into oversold territory allowed high probability traders to scale-in at exceptionally lower levels. Then a rally into strength provides the exit opportunity two to three days later.

Once a high probability trader understands the different parameters involved when trading leveraged ETFs, trading leveraged ETFs is as straightforward as trading stocks or non-leveraged ETFs. And as I noted above, adding leveraged ETF trading to your high probability trading of stocks and non-leveraged ETFs can be an excellent way to take advantage of those moments when the market extremes to both the upside and downside are especially persistent.

Learn more about trading leveraged ETFs. Click here to sign up for a free online presentation and introduction to the Fall 2010 Swing Trading College led by Larry Connors, CEO and founder of TradingMarkets. Learn quantified strategies for trading stocks, ETFs, options, leveraged ETFs and e-minis – as well as how to put your knowledge to use in building a truly professional swing trading business.

David Penn is Editor in Chief at TradingMarkets.com.