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A Near-Term View On Leveraged Energy ETFs

ETF Professor

With oil prices surging, the energy sector is getting in on the act.

Predictably, that's been good news for the Direxion Daily Energy Bull 3X Shares (NYSE: ERX). ERX attempts to deliver triple the daily returns of the Energy Select Sector Index. As of April 12, ERX was sporting an April gain of almost 14 percent, making it one of Direxion's best-performing leveraged bullish funds on a month-to-date basis.

ERX has a bearish counterpart, the Direxion Daily Energy Bear 3X Shares (NYSE: ERX). ERX attempts to deliver triple the daily inverse returns of the Energy Select Sector Index. Down 15.6 percent month-to-date, ERX is one of Direxion's worst-performing inverse leveraged funds this month.

What Traders Think

Not surprisingly, the recent oil rally sparked renewed interest in leveraged energy ETFs. For the week ended April 11, three of the nine leveraged Direxion ETFs showing the largest volume increases relative to their 20-day average were energy funds, including ERY.

Perhaps interestingly, traders aren't flocking to the bullish ERX even as the underlying Energy Select Sector Index rises. Over the past month, traders have been pulling an average of almost $40,000 per day from ERX, according to Direxion data.

Conversely, the bearish ERY is where traders are scurrying to. Over the past month, average daily inflows to ERY are north of $240,000, according to issuer data.

Why ERY May Work

There may be a technical factor at play prompting traders to consider the bearish ERY. The Energy Select Sector Index is close to making a death cross, the technical scenario where a stock or ETF's 200-day moving average falls below its 50-day line.

Historical data suggest that when a death cross is confirmed on that energy benchmark, the subsequent declines are substantial.

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