Trading ETF Pairs by Moshé Prince and Brian Scollick
How do you know what direction the market is taking and
where to invest with prevailing trends? How can you recognize
a new trend developing? Starting in 2009 until recently, several
exchange traded funds (ETFs) have gained the attention of the
market since they have been showing prevailing trends.
ETFs are made up of a fund of individual stocks that
trade like a single stock. Because they are made up of many
stocks — for example, 500 stocks in the case of the Standard & Poor’s 500 — they are diverse and have low or moderate
volatility. A single action like a CEO mismanaging assets does
not have the same impact on ETFs as it does on that specific
stock and its resulting value from the CEO’s poor choices.
I chose to track 10 pairs of ETFs, with each pair having an
inverse ETF or an opportunity to make money when the stock
market pulls back.
Both sides of the coin
During pullbacks and trend reversals, the key is to look at
pairs of ETFs — upside and downside ETFs. The real power
comes from knowing when to enter the market, exit the market,
reenter the market, and go to or stay in cash.
Trends begin to emerge or typically start from patterns
in certain sectors or areas of the market where you see continued
growth and opportunity over a period of time. The
trend can continue for a few weeks, months, or even years.
Being able to focus on trends and recognize the patterns
takes close personal scrutiny, a loyal advisor, or the use of a
Another way to identify emerging trends is by looking at a
few of the stronger stocks in the sectors of ETFs I follow. Take
a look at the technology sector, for example. The ETF pair I
look at is the Direxion Daily Technology Bull 3X (TECL)–a
Direxion Daily Technology Bear 3X (TECS) combination.
These ETFs have a higher risk since they are rated with a
beta, being 1X, 2X, or 3X, with 3X being the most potentially
volatile since it is highly leveraged.