Wednesday, July 02, 2008


The table above represents the top ten (by weight) holdings of the Dow Jones US Oil & Gas Index. As a group, they collectively sport some very weak Daily and Weekly charts. Can't short all ten of these big cap stocks?

Enter DUG, an ETF named Ultra Short Oil and Gas Pro Shares, described as follows:

Those top ten listed stocks in the table above represent 64.08% of DUG. They are leveraged 2-1, so that for every one percent the Dow Jones US Oil & Gas Index drops, DUG rises 2%. Those stocks above will constitute 64.08% of the movement of DUG.

If so, one would think that if these stocks are breaking-down, then DUG must be breaking-out.

Let's see:


That big white candle, the most recent candle on this chart, represents DUG running up about 6% on Wednesday. Any follow through will be a break-out on the Daily chart.

A break-out on the weekly chart will require DUG to close above about 28.5 this week, a little lower next week. The MACD looks like it wants to cross and the MACD momentum is about to cross-over above the zero-line.

THE TRADE: DUG is very, very close to breaking out on the daily chart, it could happen Thursday, or next Monday. On the weekly chart, the breakout could occur this week, more likely next week. This is where forecasting is more of an art then a science. Is the evidence compelling enough now to go long DUG and thus shorting with double leverage those ten stocks above all in one simple Buy?

Remember, the signal has not yet been triggered, but I will be watching DUG closely on Thursday and will buy DUG if I am convinced the break-out is happening, or at least inevitable.

If DUG breaks out, it looks to me to be at least a double from current levels.



Anonymous said...

Very educational...I am starting to get it better I just need make some profits..



Anonymous said...

The contrarian in me likes this trade a lot, but I wouldn't look at this chart in isolation. From my view, neither the oil price or the oil stocks seem to show any signs of an immediate top.

Anonymous said...

Looks like it just broke out on high volume. Allan would you buy at this level 28.40 thank you.

Allan said...

As per my comments above, I'm in.


Anonymous said...


Shall we say I'm "DUG" in at +2,500 shares?

Southern Greece

susan said...

Very interesting analysis - thanks Allan. I've put in a limit order at $26.50...hope it gets filled.

Mike said...

What goes up.....has gotta come down.

Great analysis Allan.

Some add'l food for thought....

I was checking on a Basic Materials stock yesterday:

Cleveland Cliffs, (CLF)

Big dropoff in this iron ore supplier...and along the same lines...SMN (Ultrashort Basic Materials)had a nice runup.

Like your analysis...the candles speak volumes.

Global recession....:)?


AllAllan said...

mike, SMN has a great looking weekly chart could run to 45-60 from current 33. i was working on a new blog for monday, got caught up in this great tennis match, hope in ends in time to finish blog.

Anonymous said...

Allan, Great call on DUG. Do you have any target on how far dug might run.
thank you.

Allan said...

If DUG breaks out, it looks to me to be at least a double from current levels.

DUG did indeed break-out and my target above stands.


Anonymous said...

Doesn't a stock named DUG" almost have to go down?

Why not buy a stock called "Pluto" that should go up!