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ARKK: This Is Still The Best Way To Trade This ETF

By Daniel Martins,


I re-emphasize that buying the momentum is probably the best way to trade ARKK ETF. And the rally may have already started this early in 2023.

Cathie Wood must be finally smiling big in 2023.

After the famed investment manager witnessed her flagship ARK Innovation ETF ( ARKK ) - Get Free Report sink by as much as 80% between early 2021 and the end of last year, the fund found some solid ground earlier in 2023 and has climbed nearly 50% YTD.

ARKK seems to be benefiting from what could be the end of the "out-of-control inflation" and "endless interest hike" cycle that lasted over a year. But rather than betting that the fund will continue to head higher from here, I think that a methodical approach to trading the ETF is highly advised.

Buy ARKK When It Finds Support

I have written plenty about my preferred method for owning (and then dumping, as needed) ARK Innovation. The following quote summarizes the approach:

"Buying shares now and hoping for the best is not the ideal strategy, in my opinion. The tech-rich ETF could remain in the hole for many months. [...] The solution, in my view, is to wait for the market to tell when to buy the dip. [Time] the purchases to when the price is above the 50-day moving average and [sell] shares below the trend line .

Simply using a moving average strategy does not mean that all investors will be successful in all cases. Buying and selling on momentum works best for assets that (you guessed it) like to trade on momentum.

This is especially true in the case of speculative bubbles that (1) inflate on irrational exuberance, (2) overcorrect, then (3) head higher once again. This is exactly what happened to tech stocks between the 1990s and the mid 2000s and is likely to be happening with ARK Innovation as well.

ARKK: Buying Momentum Is Working

Of course, nothing is guaranteed when it comes to investing. For example, following the strategy above would have caused me to buy ARKK in March 2022 only to sell the same shares at a small loss a few days later.

But eventually, and assuming ARKK ever climbs back to its all-time highs, buying the upswing will play out in the investor's favor. It's really only a matter of patience and diligence.

So far, 2023 is shaping up to be the year of recovery for Cathie Wood and ARKK. Those who have followed the moving-average strategy would have avoided sharp losses in 2022, and yet participated in about two-thirds of the 2023 rally.

Below is a chart that shows how a 50-day MA trading strategy on ARKK (blue line) would have fared against a simple buy-and-hold approach since the start of 2022 (orange line).
Backtest: trading ARKK based on moving averages since 2022

DM Martins Research

Notice that $1,000 invested 13 months ago and traded per the moving average rules would have still been worth less than the original investment, but not by much. Holders-at-all-costs, on the other hand, would have been in the hole by 53%!

ARK Innovation: What Next?

What happens next to ARKK is really anyone's guess. But I think that trading the ETF as described above will prove to be one of the best approaches to capture the upside opportunity that is evident while limiting the downside risk that still exists.

Ask Twitter

ARK Innovation is up nearly 50% YTD, which is absolutely astonishing. Do you think the ETF is finally ready to recover back to all-time highs, or will it retest lows once again?

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)

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