Energy Bear ETFs Break Out After Sluggish Chinese Data

Oil prices slip on on weaker Chinese data and rising COVID cases

Inverse energy exchange traded funds (ETFs)—which trade in the opposite direction to the sector—broke out from recent consolidation after oil prices slumped as much as 3% Monday on the back of weaker Chinese economic data that raised concerns over slowing growth in the world's second-largest economy.

Key Takeaways

  • Oil prices fell after Chinese data pointed to a slowdown in economic growth, implying lower demand for the commodity.
  • The Direxion Daily Energy Bear 2X Shares (ERY) broke out above a symmetrical triangle pattern's upper trendline in a move that could trigger a test of higher prices around $25.
  • The ProShares UltraShort Oil & Gas (DUG) broke above the top trendline of a symmetrical triangle, which may lead to a sustained rally to the psychological $20 level.

Lower-than-expected factory output and weaker retail sales last month, coupled with a global spike in the highly infectious delta COVID-19 variant, intensified speculation over demand for the commodity. "With COVID cases rising, the demand outlook is looking unclear, so traders are increasingly wary about hedging and locking in prices," Price Futures Group analyst Phil Flynn said, per Reuters.

Below, we take a closer look at the details of two of the energy sector’s largest inverse ETFs and pinpoint potential trading plays using technical analysis.

Direxion Daily Energy Bear 2X Shares (ERY)

Launched at the height of the global financial crisis in 2008, the Direxion Daily Energy Bear 2X Shares (ERY) aims to generate twice the daily return of the Energy Select Sector Index. The fund suits traders who seek leveraged exposure to key industry names, given the tracked index top weights bellwethers Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX), each with respective allocations of around 20%. Trading-wise, more than 1 million shares exchange hands per day on a razor-thin 0.07% average spread to minimize slippage. Meanwhile, the annual management fee of 1.05% shouldn't affect short-term trading strategies. ERY controls nearly $26 million in net assets and is trading 52% lower on the year as of Aug. 17, 2021.

ERY shares broke above a long-term downtrend line in mid-June. Since that time, however, the price has consolidated within a symmetrical triangle, with neither the bulls nor bears able to gain the ascendency. That changed yesterday when the bulls used softness in oil prices to drive a breakout above the pattern's upper trendline—a move that could trigger a test of higher prices in the mid to short term. Those who buy here should consider booking profits near $25, where the price finds resistance from the January swing low and downward sloping 200-day simple moving average (SMA). Guard against a failed breakout by placing a stop-loss order just beneath the triangle's lower trendline.

Chart depicting the share price of Direxion Daily Energy Bear 2X Shares (ERY)

A symmetrical triangle is a chart pattern characterized by two converging trend lines connecting a series of sequential peaks and troughs. These trendlines should be converging at a roughly equal slope.

ProShares UltraShort Oil & Gas (DUG)

The ProShares UltraShort Oil & Gas (DUG) seeks to return double the single-day performance of the Dow Jones U.S. Oil & Gas Index—a market-cap-weighted index comprising leading U.S. oil and gas companies. As its name suggests, the ETF focuses on providing active traders with geared exposure to firms primarily engaged in oil and gas exploration and production. Industry-respected names that make up the benchmark's 34 holdings include EOG Resources, Inc. (EOG), Schlumberger Limited (SLB), and Phillips 66 (PSX). Deep dollar volume liquidity of over $5 million per day, along with average penny spreads, makes the fund a traders' favorite within the segment. As of Aug. 17, 2021, DUG oversees $19.4 million in assets under management (AUM), offers a 3.3% dividend yield, and has slumped over 50% since early January.

Like ERY, the DUG share price bottomed out over the summer months and has traded mostly sideways since. Monday's breakout above the top trendline of a symmetrical triangle may lead to a sustained rally to the psychological $21 level—an area the price may run into overhead resistance from the January swing low and falling 200-day SMA. Manage downside risk by positioning a stop slightly under last week's low at $12.88.

Chart depicting the share price of DUG.

Downside risk is an estimation of a security's potential loss in value if market conditions precipitate a decline in that security's price. 

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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