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  • Writer's pictureTrader Stewie

Trading Leveraged ETFs: $SOXL!

Updated: Jul 7

Hi Folks,


I just wanted to do a quick review on a recent trade Art of Trading members made on $SOXL. This was the Top Pick of the week for the week of July 1st. We actually made a very similar trade built around the same setup earlier this year too. You can read that full review buy following this link here: [Click]





So lets do a deep dive into what made this an A+ setup once again last week! As you probably already know the semiconductor sector has been driving markets higher this year with $NVDA leading the way. $AVGO, $MU, & $QCOM are playing a role in that sector too. $NVDA has traded an astounding +154.09% higher YTD!

As a short term swing trader you simply can not ignore the strength of the trend in this sector. The development of Artificial intelligence and the race to be the biggest, strongest, and best is the theme!


"But I don't want to chase the hype!?! How could I possibly get involved?"


Often when a market or in this example a sector is in a strong multi-month rally mode, short and quick (5 - 7 trading days) pullbacks are a place for strong risk vs reward opportunities. Its important to pick a timeframe that makes sense in terms of the length of the trend and how the stock trades on a day to day basis. Usually a strong multi-month trend gives proper perspective on a daily timeframe chart.


Its much easier to get involved in the sector as a whole during a pullback phase than it is hoping you've picked the "right" stock to bounce with the group. You can achieve this by trading an ETF that contains a weighted basket of multiple stocks within the sector!


Its very important to keep things simple.


  • Zoom out to timeframes that make sense to the trend

  • Is the trend clearly defined within the timeframe?

  • Use 1 or 2 moving averages that follow the trend

  • Where has the stock been? Where is it likely to go?


Here's the chart I use to identify the strength of a trend in $SOXL.


You can clearly see when a strong trend establishes itself. The ETF trades inline with the 20EMA. When short term 5 - 7 day pullbacks occur the ETF starts to trade slightly below the 20EMA allowing for strong entry points marked by the blue arrows.


This also coincides with the "Holy Grail" setup that we've reviewed many times in the past on this blog. A link to that educational post can be found here:


When the trend begins to fail the ETF starts to trade below the 20EMA for consecutive days and volatility within the daily price movement begins to pick up. After the volatility subsides the ETF begins to trade sideways and reclaims back above the 20EMA and a new trend higher resumes.



"So how is all this similar to the most recent trade we made on the ETF?"


Its similar because the following conditions were met:


  • $SOXL made a quick 5 - 7 day pullback

  • A strong multi-month trend was intact

  • During the pullback phase the ETF tested and held the 20EMA (Holy Grail)

  • Strong risk vs reward made the setup appealing


Review the chart below that highlights the attributes of the technical setup:


Here is the original $SOXL chart and thoughts that were shared with Art of Trading members:


$SOXL

Acting well here as it forms a decent Holy Grail pattern here(multiple tail candles on the 20 day MA). Look for more upside reversal/bounce in the next few days/ weeks. Targets: $60 to $65



A quick rule of thumb especially with leveraged ETFs is to first off give you trade enough room to breath. A stop loss on a setup like this would look like $51 - $50 price points, marginally lower than the $52 intraday low the ETF traded for 5 days prior. There is nothing worse than getting into a perfectly sound technical setup with a stop that is much too tight. If the question becomes "well if I have a stop that low I'll lose far to much money" you're simply trading much bigger than you should be for the setup in place.


"If the stock starts to run higher from my entry, quickly how do I manage it?"


I get this question a lot. Traders will say "I entered this stock here and I'm up 17% in the last week! I think it can go higher but I'm afraid to hold onto it much longer because I've made so much money on it!!!" Traders tend to forget that they don't have to sell an entire position all at once. You can manage a trade by selling part of the position, I usually suggest half. Then raise your stop and keep the second half of the trade on to continue on with the trend.


Art of Trading members did exactly that with the $SOXL trade last week. We sold 1/2 of the trade at $61 and sold the second half at the end of the day Friday. This way we protected profits, reduced stress and allowed the trade to run further if the market allowed it. In total we realized +12.03% on the trade in 3 trading days (Not including the holiday)


$SOXL was our Top Pick for week 27 of the 2024 strategy. We track that performance each week here: [Click] . So far for 2024 the strategy is +49.02% YTD. Standing at a 59% win rate.






Ok, well how do I analyze an ETF? What does that even mean?


You can take the analysis on a trade within a concentrated ETF a step further and analyze the weighting of each holding and explore the technicals of the charts that have the most influence on the ETF. This is good practice if you're trying decipher a "healthy pullback" from maybe a pullback that could potentially break further down.


You can do this with any concentrated ETF really as long as the top 10 holdings carrying significant weight within the ETF. This weight influences the ETF because if the stock moves it actually has an impact on the ETF. Think $ARKK, $TQQQ, $TECL, $SOXL, and many more.


I like to go to the website of the ETF to find the most up to date weighting. This is what $SOXL (LINK) looks like:


As you can see $NVDA, $AVGO, $AMD, $QCOM and $INTC carry significant weight at the top 5 and even the remaining 5 make a large portion of the weighting up!


As I mentioned earlier its simply a basket of stocks but to understand how the ETF may react in the short term it makes sense to review the top holdings. Its quick and easy to do!


These were my observations for $NVDA, $AVGO, $AMD, and $QCOM last week:


$NVDA

NVDA (and $SMH Semis ETF) has been the leading sector for the entire year thus far. Leading sectors are buys on pullback phases. Liking the 15% pullback in NVDA last few days to test the 20 day MA. It's the first 20 day MA test since the late May PEG candle. Good spot for a reversal and bounce especially in leading PEG stocks! Really like this setup here. Target: $135 to $140


$AVGO

Made a PEG recently and now making a healthy pullback. Look for upside out this week of the consolidation pattern that's testing the 20 day MA here. Target: $1800


$AMD

After a big pullback off March highs and multiple months of frustrating chop, think this one might be ready for a Q3 and Q4 rally phase now going into the next earnings report. Hints of Accumulation Volume(black arrows) patterns emerging once again! Target: $200+


$QCOM

Showed the similar attributes as $NVDA and $AVGO. Pulling back in orderly fashion nearly into the 20EMA before starting a potential continuation move higher with the longer term trend. Target $220 - $230


So as you can see with the charts above the attributes of the technical setups are all quite similar. Like I mentioned earlier in this post, when you buy an ETF its a basket of stocks and the ETFs movement is influenced by the way the stocks are weighted within the holding. This is where trading a leveraged ETF during a pullback phase can be a powerful tool in your trading toolbox. Unlocking that power comes down to examining the holdings and making sure that the majority remain strong. If this is the case after analyzing the top holdings within the ETF you might just have an A+ trading setup on your hands!


Thanks for reading! I hope this step by step educational blog post unlocks some new knowledge helping you along within your trading journey!







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