Trading By the Numbers: Profit-Taking in the Oil Patch

On a day when sellers overwhelmed buyers, it is fitting to find that some of the strongest selling came in markets where buying had been especially intense.

The fact that some of the biggest short term edges were in ETFs, for example, betting against higher prices in oil and energy stocks was an excellent hint for short term traders that some form of profit-taking in the sector was likely in the near-term. And while no one could have predicted the breadth and severity of the midweek sell-off, the idea that oil and energy stocks might play a significant role in sending overall markets lower should come as little surprise to anyone with access to the data.

In this case, “the data” were the sizable positive edges in exchange-traded funds like the ProShares UltraShort Oil & Gas ETF (DUG) and the Direxion Energy Bear 3x Shares (ERY). Designed to replicate twice the inverse of the daily returns of the Dow Jones U.S. Oil & Gas Index and three times the inverse of the daily returns of the Russell 1000 Energy Index, respectively, both exchange-traded funds had become extremely oversold in recent days and were increasingly likely to reverse back to the upside.

How oversold had the two ETFs become? Shares of DUG were trading near their lowest levels of 2011 after finishing lower for five days in a row heading into Wednesday’s open. Shares of ERY actually set a new yearly low during their most recent five-day slide, before bounding higher by more than 12% on Wednesday.

In both instances, the Wednesday rallies were strong enough to retrace the previous four selling days. The strong, one-day moves have put the ETFs back in overbought territory ahead of trading on Thursday. Traders fortunate enough to have taken positions when the edges in these funds were at their greatest may be quick to lock in gains of their own given the market’s recent volatility.

The ETFs in today’s report were drawn from the data and research available through The Machine. To find out more, click here.

David Penn is Editor in Chief of