Oil Bear ETFs Dig Claws in at Chart Support

Energy giant says 25% of shut wells have recommenced operations

Since hitting the bottom of the barrel at around minus $40 on April 20, oil prices have staged a sharp recovery as global energy producers slashed output to ease storage shortage concerns. Furthermore, the winding back of lockdown measures and subsequent uptick in economic activity has boosted sentiment.

Despite the commodity's run-up, oil prices may come under pressure in the coming weeks as shale producers prepare to start ramping up production now that West Texas Intermediate (WTI) has stabilized in the high $20s to low $30s. "With futures prices back over $30 per barrel, if they rise much more, some drilling will start to become economic again, perhaps limiting further upside potential for prices," Reuters market analyst John Kemp wrote in his weekly column.

Indeed, Mackie McCrea, president and chief commercial officer of Energy Transfer Operating, L.P., said that one-quarter of shut-in wells in the Texas Permian Basin region had already recommenced operations as of May 10, per Bloomberg.

From a technical standpoint, each of the energy inverse exchange-traded funds (ETFs) outlined below trades near 12-month support. Let's take a closer look at the details of each and work through several tactical trading ideas energy bears could employ.

Direxion Daily Energy Bear 2X Shares (ERY)

The Direxion Daily Energy Bear 2X Shares (ERY) aims to return twice the inverse daily performance of the Energy Select Sector Index – a market-cap-weighted index of large U.S. energy companies. Average dollar volume over $20 million provides plenty of liquidity; however, a 0.30% spread makes the fund more suited to exploiting larger intraday moves rather than quick scalps. The fund's 1.07% expense ratio is typical for a product that uses derivatives to achieve its leveraged returns. ERY has gained 46.7% on the year but has dropped nearly 23% over the past month as of May 20, 2020.

The fund has formed a mountain-like peak on the chart so far this year, with price basing near a critical horizontal line at $55 after a two-month decent. After threatening to break down below this level in Monday's session, the price reversed back to the upside yesterday, indicating a possible head-fake trade. Those who buy here should place a stop-loss order below $50 and target a move to $100, where the ETF may run into resistance from the April downtrend retracement and falling 50-day simple moving average (SMA).

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

ProShares UltraShort Oil & Gas (DUG)

With assets under management (AUM) of $15.71 million, the ProShares UltraShort Oil & Gas (DUG) fund has an objective to deliver twice the inverse daily return of the Dow Jones U.S. Oil & Gas Index. Decent share turnover combined with an average 0.24% spread keeps transaction costs competitive for a geared fund in the energy space. As of May 20, 2020, DUG charges a 0.95% management fee and has slipped 22.21% year to date.

Although the fund has remained below the 200-day SMA for most of May, price encounters support from a 12-month trendline that connects the June 2019 swing high and a February pennant pattern. Furthermore, the moving average convergence divergence (MACD) line crossed above its trigger line earlier this month to generate a buy signal. Tactical traders who open a long position should set a stop under Monday's $44.28 low and book profits on a test of overhead resistance at $80.

Chart depicting the share price of the ProShares UltraShort Oil & Gas (DUG)

Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares (DRIP)

Launched in 2015 and yielding 5.07%, the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares (DRIP) attempts to return twice the opposite performance of the S&P Oil & Gas Exploration & Production Select Industry Index – an equal-weighted index of the U.S. large-cap oil and gas exploration and production companies. More than 3 million shares exchange hand most days on an average six-cent spread to keep trading costs manageable. The fund controls assets of nearly $30 million, charges a 1.07% management fee, and is trading 35% lower year to date.

Since setting a 52-week high on March 12, DRIP shares have trended mostly lower, although the price has stabilized somewhat this month close to vital support at $6.50. Those who enter near this possible trading floor should consider setting a take-profit order near key resistance at $15 while managing downside risk with a stop placed beneath the May low.

Chart depicting the share price of the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares (DRIP)
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