Possible Monetary Policy Pivot Allows For Speculation In Direxion's 3X Homebuilders ETF (NAIL)

At first glance, circumstances may not appear particularly auspicious for the benchmark Dow Jones U.S. Select Home Construction Index. After starting the first quarter of 2024 on a strong note, the index saw its positive momentum trimmed as consistently hot jobs reports slammed the brakes on the Federal Reserve implementing interest rate cuts.

From a monetary policy perspective, the most recent May employment readout represented a case of good news being bad news. On the positive front, U.S. employers added 272,000 nonfarm payrolls last month, far more than the 180,000 that economists had anticipated. However, on the less-encouraging side of the spectrum, a strong labor market means more dollars are chasing after fewer goods, which is inflationary.

Earlier this week, Apollo Academy released its mid-year outlook, declaring broader conditions to be "in a state of unstable equilibrium, with powerful forces pulling the economy in oppositive [sic] directions." What made this assessment disappointing was that the domestic economy initially demonstrated greater resilience than the Fed expected.

However, there may still be hope for more accommodative monetary policy. In the May jobs report, the unemployment rate moved up from 3.9% to 4%. Further, the most recent jobless claims report showed that the four-week average increased to 232,750 claims last week. As Reuters noted, that was the highest reading since mid-September.

In other words, the economy may not be as robust as many assume. Economist Claudia Sahm – who is behind the Sahm Rule that predicts recessions based on unemployment rates – warned that the Fed's reticence to cut the benchmark interest rate could lead the economy into recession.

Therefore, lower borrowing costs could still be on, and that may spark speculation in Direxion Daily Homebuilders & Supplies Bull 3X Shares NAIL. A three-times-leveraged exchange-traded fund, NAIL is only appropriate for short-term positions: quick in, quick out. Extended holding of leveraged ETFs can result in a dissociation between actual and expected performance due to the daily compounding effect necessary to "reset" the fund's leverage.

Still, those who are extremely confident in a directional play can act on the opportunity with a leveraged ETF. The primary benefit is that traders can enjoy the leverage without having to open a margin account.

The NAIL Chart: From late October last year to December, the NAIL ETF saw a significant jump higher, likely due to speculation of interest rate cuts. The leveraged fund continued to march higher into the end of May. From April onward, however, sentiment had begun to fade as the conditions for a rate cut diminished.

• Interestingly, the NAIL chart may look bearish when viewed from the past three months. However, the ETF's 200-day moving average has provided support.
• Looking at the narrative in totality, it's possible that the fading pattern since the beginning of April may represent a bullish falling wedge. This pattern features two converging trend lines that are sloped against the prevailing bullish trend.
• If NAIL is indeed forming a falling wedge, market participants should be on the lookout for a potential swing higher. As the trend lines converge, the price action may become extremely condensed, resulting in a breakout or a breakdown.
• Jumping past the 50 DMA ($109.10) will likely confirm an uptrend while slipping below the 200 DMA ($95.23) may result in a sharp corrective move.

Featured photo by Pexels from Pixabay.