Taking Sides in the DUST Trendline Battle

There's a trendline battle shaping up on a daily chart of the Direxion Daily Gold Miners Bear 3X Shares (DUST) -- an exchange-traded fund (ETF) meant to deliver a triple-leveraged inverse return of a basket of gold mining stocks. While the descending 160-day moving average has kept a tight lid on all rally attempts since early May, DUST has recently established a credible foothold above its rising 30-day moving average (a shorter-term trendline we've often found useful in tracking the patterns of volatile instruments).

The channel created by these two trendlines has compressed DUST into a tight trading range between the $26 and $28 levels in recent sessions. In fact, as of Friday afternoon, 60-day historical volatility on DUST fell to a new annual low of 57.6%, per Trade-Alert. When price action is "compressed" to this extreme degree, it's often the lead-up to a breakout move higher or lower -- and in the case of DUST, two compelling pieces of evidence suggest the scales are currently tipped in favor of the 160-day moving average prevailing over its 30-day counterpart.

First is the troubling trend in fund flows. Per etf.com data, DUST has registered net outflows of $177.65 million since the start of September (through Nov. 16), effectively wiping out more than 41% of the net inflows collected during the first eight months of the calendar year. A continued stream of outflows would obviously complicate DUST's attempts to capitalize on newfound support at its 30-day moving average.

And then there are short sellers, who appear to have experienced a collective awakening to the possibilities of shorting DUST (an instrument that, by its issuer's own disclaimer, is generally ill-suited for use over time frames longer than a day).As of Oct. 31, Direxion was reporting a "since inception" loss of more than 40% for DUST -- and the fund's triple-leveraged bull counterpart, trading under the ticker symbol NUGT, sports a decline of roughly 60% over the same roughly seven-year window. So, more or less irrespective of the directional bias underlying each ETF, it would seem that both of these leveraged vehicles are predisposed to buckling under the force of sheer gravity.

In response, short sellers have more than doubled their bets against DUST in 2017. Short interest is up 150% since the start of the year, and -- at 5.41 million shares -- is hovering just a chip-shot away from September's record high levels. However, the shorts show no signs of backing down just yet, judging by the 10% increases in short interest during each of the past two reporting periods.

So with DUST looking due for a high-volatility directional breakout from its recent slumber, we'd stack the odds in favor of a downside breakout -- with the caveat that high short interest could contribute to a breakout rally, in the event of a positive catalyst for DUST (or a negative catalyst for gold miners, if you'd rather). In any case, now is a cheap time to load up on short-term DUST options, based on Friday's 30-day at-the-money implied volatility of 62.9%, in the 5th annual percentile. But if you do decide to speculate on DUST's next big move, aim to limit your time frame to hours or days -- not weeks or months.