Monday, 24 September 2007

Energy Trade Update

I've been watching my DUG UltraShort Oil & Gas ETF drop with dismay in recent weeks and thought I should check where things stand vis-a-vis my stop for this setup. I'm using DUG to short energy stocks in accordance with my bearish signal for Canadian Energy iUnits (XEG).

I would have used the Horizons S&P/TSX Energy Bear Plus ETF (HED) instead, but it's only been on the market since June. (I got my bearish signal in the April 3 COTs report, for execution with a three-week delay on the open of trading April 30.) Average daily volume is still only 27,000, less than the 50,000 units needed for adequate liquidity to buy it, according to Don Vialoux.

DUG has yoyo'd up and down like crazy since April, especially during the Subprime Meltdown of 2007, when it shot up in a huge way. This morning, the ETF is down 28 percent since the April 30 open. Since DUG is a 200-percent leveraged ETF, this effectively means a 14-percent drawdown for purposes of my risk-management stop rule. The 14-percent loss exceeds my 8-percent stop for XEG, but not my 19-percent stop for Oil Services Holders (OIH). As I explain in "How It Works" (see Navigation bar), I set my stops in my trading system based on the largest intratrade drawdowns that my setups have seen in the historic data.

Sadly for me, XEG itself is only up 2.4 percent since the open April 30! So the signal wasn't so wrong when it came to XEG. The problem is that DUG clearly isn't very suited to fading XEG. Unfortunately, HED isn't yet an option due to the volume problem. So where does that leave me? I'm going to start using OIH for signals for this trade since DUG's fortunes are clearly more closely tied to those of OIH. I'm also on "stop watch" for dumping my holding if it exceeds the 19-percent loss.


The Word said...


A few comments if I may.
Don Vialoux is also the person who claims that TA does not work on income trust because of the high yield...! And I stongly dissagree with him. I wonder what his 50K volume minimum is based on. I am long Horizon Energy Bear and had no problem taking a position. Horizon provide a ridiculous spead but there is always a bid and ask available.
I came to the same conclusion as you using another method but that's ok right?
HED is a strange animal as it seems to have been designed quite differently from the long portfolio by Horizon. Long is quite sensitive to the large caps while short is more coorelated with the medium cap. Strange indeed.
Finally, I understand your delaying trading based on history but that's the part of your "system" I am careful with. Surely different market environnements warrant different entry and exit TIME points. Would'nt volatility (VIX for example) not be a factor to consider for timing a trade?

The Word

Alex Roslin said...

Hi The,

Thanks for your comment. The spread you mention is I believe the kind of thing that concerns Don. The trade delays were based on my historic backtesting, and certainly the optimal delay may change as the market environment changes. My plan is to integrate such changes as they make themselves felt in the longer-term data when I go through my regular process of updating my setups.

There can be many other indicators to help time trades as you say, like VIX or simply price action. Unfortunately, at this point, the COTs data isn't ample enough in most markets to integrate extra indicators as part of a trading system while keeping any kind of statistical robustness. The more indicators, the less statistically confident we can be of the results of all those indicators translating forward.


The Word said...


Check out this site. A COT follower as well which you may or may not find interesting.

No need to post this on your site please