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Our ETF Trading Strategy With New “Sell” Signal On Market Timing Model ($QQQ, $SPY)

After the major indices began pulling back from their highs in late September, then subsequently bounced in the beginning of October, our disciplined, rule-based market timing system shifted from “confirmed buy” mode to “neutral” mode on October 5. This change in our market bias perfectly coincided with the peak of the bounce off the lows of late September. In “neutral” mode, we can be positioned either long or short, but position size of all new trade entries will be lighter than usual, in order to reduce risk. Also, our portfolio will be primarily (or fully) in cash, with only a few positions in either direction.

As we entered into neutral mode on October 5, we exited all long positions in individual stocks and began focusing primarily on swing trading ETFs with a low correlation to the direction of the overall stock market (ie. currency, commodity, fixed income, and international ETFs). One week later, on October 12, the necessary signals were generated for a new “sell” signal (click here to review each of the five different modes of our timing model). The recent changes in our sentiment, based on our market timing system, are shown on the daily chart of the PowerShares QQQ Trust ($QQQ) below. Notice how the model is designed to keep you out of trouble when the going gets rough:



If we enter any individual stocks right now, the trades will be on the short side. But with ETFs, we have the choice of being short, buying an inversely correlated “short ETF,” or simply trading ETFs that are not correlated to the direction of the broad market. The latter is what we are doing right now. In addition to our three open positions, there are two new ETFs on our trading watchlist for potential entry in the coming days ($FXE and $SIL long). The technical setups of both these potential trades were discussed in the October 19 issue of our swing trading newsletter. Both of these ETF trade setups are low-risk ways to profit from weak market conditions for traders who are unable to sell short if they have a non-marginable cash account (such as an IRA).

Presently, we have three open ETF positions in our model ETF trading portfolio, each of which is showing an unrealized gain due to its low correlation to the direction of the broad market. US Natural Gas Fund ($UNG) is presently showing a 4.2% gain since our October 9 entry, FirstTrust Natural Gas Index ($FCG) is up 2.2% since entry, and our partial position of iShares Colombia Index ($GXG) is now trading 2.6% above our entry price. Since these ETFs have exhibited solid relative strength as the market sold off sharply over the past week, we anticipate further gains in the days ahead and will soon be raising our protective stops to lock in gains along the way.

In last Friday’s commentary, we said, “We can’t expect much from the S&P 500 if the Nasdaq is not on board. Over the past few weeks, two key Nasdaq leadership stocks, GOOG and AAPL, have broken down below their 50-day moving averages. These leaders are being replaced this week by insurance and utility stocks….this is not the type of rotation that inspires confidence.” Given that AAPL declined another 3.7% in last Friday’s session, further deterioration in leading Nasdaq stocks indeed played a big role in the day’s sharp decline. We continue to expect further pressure on the broad market as long as leading tech stocks remain weak. This week, all eyes will be on the quarterly earnings report of AAPL, which is due to trumpet its latest results on Thursday after the close.

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Two Bullish Emerging Markets ETFs In A Bearish Stock Market ($EEM, $EWH)

Over the past week, we have been noticing an interesting and notable divergence between the performance of U.S. broad-based ETFs and select emerging markets ETFs. The PowerShares QQQ Trust ($QQQ), which tracks the Nasdaq 100 Index, has convincingly broken down below key intermediate-term support of its 50-day moving average and is technically in bad shape. However, the iShares Emerging Market Index ($EEM) has been consolidating in a tight, sideways range during the same period, and also formed a “higher low” within its base of consolidation. With a little help from a bounce in the broad market, EEM will likely break out above the highs of its range and start making another leg higher. The daily chart of EEM below illustrates this:



Looking at the longer-term weekly chart of EEM, notice that the consolidation on the daily chart follows a recent breakout above resistance of an 18-month downtrend line, which should now act as the new support level:



Of the various countries that comprise this emerging markets ETF, one of the best looking country-specific ETFs is iShares Hong Kong ($EWH). As shown on the daily chart below, notice that EWH has been neatly holding near-term support of its 20-day exponential moving average, and is now poised for a breakout to a fresh 52-week high:



When an ETF has so much relative strength that it simply trades in a tight, sideways range while the rest of the broad market is trending lower, it clearly indicates a lack of selling interest. As such, it doesn’t take a lot of buying interest in the broad market to subsequently move the ETF higher. Therefore, both EEM and EWH are potential buy candidates if they rally above their respective horizontal price resistance levels. This could easily happen as soon as we see the first decent bounce in the U.S. markets.

As mentioned yesterday, we presently have the choice of being short, buying inversely correlated “short ETFs,” or trading ETFs with a low correlation to the direction of the broad market. Since these are international ETFs, there is a low correlation to the direction of our domestic markets. Accordingly, both EEM and EWH could be considered for potential buy entry IF they trade above their trigger prices, despite the recent “sell” signal on our market timing model. EWH is probably the better choice of the two because it is poised to breakout to a new 52-week high. Nevertheless, we are not yet listing either ETF as an “official” trade setup because we first prefer to see at least a bit of broad market stabilization, which would reduce the odds of a false breakout if these ETFs attempt to move to new “swing highs.”

For those who are new to trading or new to running a disciplined system, there will be a few times a year when there simply isn’t much to do. When this happens, there is no need to force the issue. If you are keeping track of your trade stats (and we know you are), you should be able to review these periods when you should have done very little and analyze each trade taken. Did you really have a good reason to put the trade on or were you simply trading because you were bored? Are you taking setups outside of your methodology just to satisfy the urge to do something? What was the overall outcome? For us, we plan to remain disciplined and patiently wait for the pitch, following the proven methodology of our swing trading system.

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Where Will The Nasdaq, S&P 500, and Dow Find Support And Resistance? Here’s Our Take…

As market conditions continue deteriorating, many traders and investors are now seeking guidance to help them determine where the S&P 500, Nasdaq, and Dow Jones may find support, as well as the levels where these major indices are likely to encounter resistance when eventually attempting to rebound. As such, this article will provide you with a clear, objective look at the technical chart patterns of broad-based ETFs that track the S&P 500 ($SPY), Nasdaq ($QQQ), and Dow Jones ($DIA). Let’s start by analyzing the daily chart of the S&P 500 SPDR ($SPY), a well-known ETF trading proxy for the benchmark S&P 500 Index:



Until yesterday, it would be fair to say that the chart pattern of SPY had not yet convincingly broken down. Rather, the index had been clinging to key intermediate-term support of its 50-day moving average. Furthermore, the “hammer” candlestick pattern that formed when on October 22 was slightly encouraging because a bullish reversal bar that coincides with an “undercut” of an obvious support level often precedes a rally. But not this time. The mere fact that SPY opened below the October 22 low in yesterday session was quite negative. Now, the 50-day moving average should act as a significant resistance level on any subsequent rally attempt. The prior lows from the previous trading range (the dashed horizontal line) will also act as a substantial area of resistance. New traders need to know the following basic tenet of technical analysis: a prior level of support becomes the new level of resistance, after the support is broken (and vice versa).

Although it is bearish that SPY now has a plethora of overhead supply and technical resistance levels to contend with, one potential ray of sunshine in the storm clouds is that SPY is coming into major support of a year-long uptrend line. This is annotated on the longer-term weekly chart of SPY below:



The longer a trendline has been in place, the more likely the trend will remain intact. Therefore, it is positive that SPY is now coming into support of an uptrend line that began with the lows of October 2011. If SPY is looking for an excuse to bounce from current levels, this would fit the bill. HOWEVER, with our market timing model now in “sell” mode and the daily chart pattern starting to look at bit ominous, this does not mean swing traders should be looking to step in and start buying stocks. Rather, we view any stock market bounce from here merely as an opportunity to dump any badly losing positions one may still be holding (shame on traders who failed to honor their protective stops). Furthermore, one could be looking to establish new short positions when the broad market starts bouncing into its new resistance levels, which would thereby create positive reward to risk ratios and low-risk entry points for selling short and/or buying inversely correlated “short” ETFs.

For the sake of brevity, we will skip analysis of the Dow Jones SPDR ETF ($DIA) because both its daily and weekly chart patterns are quite similar to SPY above (broke down firmly below its 50-day moving average yesterday, and is also coming into support of its year-long uptrend line). Instead, let’s jump to the daily and weekly charts of PowerShares QQQ Trust ($QQQ), a popular ETF that tracks the performance of the tech-heavy Nasdaq 100 Index (which has been trading in similar fashion to its sibling, the Nasdaq Composite Index). Our annotated daily chart of QQQ key is below:



It takes only a quick glance at the chart above to notice that QQQ began breaking down well ahead of SPY, and is technically in much worse condition. In the October 8 issue of our swing trading newsletter (and on this blog post), we provided five technical reasons we felt stocks were poised to move lower in the near to intermediate-term. One of those five reasons was the formation of a bearish “head and shoulders” pattern that was forming on the chart of QQQ key to at the time. Just one day later, QQQ began following through on the bearish pattern by slicing through its 50-day moving average. Technical analysis states the projected decline of a “head and shoulders” pattern is equal to the distance between the top of the “head’ and the “neckline.” That equated to a projected drop of approximately 4.2% at the time of our initial October 8 warning. Since then, QQQ has fallen 4.4%, which means it has fully followed-through on the projected decline of its “head and shoulders” pattern.

As for support on QQQ, the index is now approaching major long-term support of its 200-day moving average, which is just below yesterday’s low. The last time QQQ came into support of its 200 day MA was at the beginning of June 2012, which marked the low of the correction that spanned from March through May of 2012. As for the weekly chart pattern, QQQ is now trading just below its one-year uptrend line (similar to the one shown on the weekly chart of SPY). However, support of its 200-day moving average is at least equally as important as a one-year uptrend line.

As the chart patterns above clearly illustrate, we are now dealing with a stock market in which sentiment has clearly reversed over the past several weeks. As it is designed to do, our rule-based system for market timing provided the requisite signals for us to close our long positions (other than ETFs with low correlation) and get out of the way before downside momentum really started kicking in. Now that the change to an overall bearish sentiment has been confirmed, we are now patiently waiting for an eventual bounce in the broad market that will provide us with ideal, low-risk entry points on new short positions or inversely correlated “short” ETFs. In the coming days and weeks, we will be providing subscribers with our detailed entry, exit, and target prices of any swing trade setups that qualify.

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How To Find The Best Entry Points For Short Selling Stocks

Because fear is a more powerful human emotion than greed, stocks nearly always fall much faster and more violently than they rise. As such, there are key technical differences in our trading strategy with regard to the price levels where we look to sell short stocks, compared to the ways in which we buy stocks. In this article, we summarize our basic trading strategy for determining the most ideal, low-risk entry points for short selling stocks and ETFs.

Since our rule-based system for market timing switched to a new “sell” signal on October 12, our swing trading focus is now on selling short weak stocks, rather than buying stocks with relative strength to the broad market. It is crucial to realize that trading in the same direction as the dominant broad market trend is, and has always been, the first and most important element of our swing trading system.

Presently, the majority of stocks we are monitoring for potential short sale entry have either set a new “swing low” within the past few days, or are trading too close to a prior low, to initiate a low-risk entry point at current levels. We do not sell short stocks that are breaking down below obvious levels of support, as they tend to rebound and rip higher after just one to two days of weakness.

Our most ideal short selling candidates are stocks and ETFs that have recently set new “swing lows” (or are testing prior lows), and have subsequently bounced into resistance over a period of three to ten days. But even though we prefer to wait for a bounce before entering a new short position, it is important to realize we do not enter a new short position while the stock is still bouncing (trying to catch the high of the bounce). Rather, we first wait for subsequent confirmation that the stock is about to stall again. This typically comes in the form of either a bearish reversal bar (such as a bearish engulfing or hanging man candlestick pattern) or sharp opening gap down, which signals the short-term bounce is losing steam. Similarly, we always take the same approach on the long side when buying pullbacks of uptrending stocks; we always wait for a pullback to form some sort of reversal pattern before buying (rather than trying to catch the bottom of the pullback).

Below is a chart of O’Reilly Automotive ($ORLY), which is a good example of what frequently happens when attempting to sell short a breakdown below an obvious level of price support. Again, entering a new short position as a stock is breaking down below the low of a range is something we are not very comfortable doing:



A lower risk way of initiating a new short sale, which also provides you with a more positive reward to risk ratio for the trade, is shown on the following chart of Check Point Software ($CHKP). This is an example of what we are looking for when entering a short position (although the declines are not always as dramatic):



On October 17, CHKP gapped down sharply, on huge volume, due to a negative reaction to its quarterly earnings report. This caused the stock to crash through a four-month level of price support at the $44 area (dashed horizontal line). But over the past week, notice that CHKP has been climbing its way back up to test new resistance of its breakdown level. If CHKP now manages to probe above the intraday high of October 17, it would see some short covering, as most traders would not have expected the price action to climb back to that level. Further, the 20-day EMA is also above to lend a little more resistance. It is at that point ($44.50 to $45 area) that we would look for the first bearish reversal candle OR opening gap down to initiate a very low-risk short selling entry with a positive reward-risk ratio. By waiting for a significant bounce into new resistance of the breakdown before selling short, we can “be right or be right out” by keeping a relatively tight protective stop.

In our swing trading newsletter, the current near-term plan with regard to individual stock and ETF trades is to remain patient and wait for proper, low-risk short setups to emerge. When the stock market eventually and inevitably bounces, we anticipate nice short selling opportunities to develop, and we will be prepared to take advantage of them. As for the long side of the market, we are not even looking for new buy entries right now because the overall stock market has simply deteriorated too much for our liking. At a minimum, even the best stocks and ETFs will now require at least six to eight weeks for new bases of support to develop.

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How To Quickly Scan For The Best Stocks For Short Selling

In my last post on this thread (above), I summarized my basic strategy for finding the best entry points for short selling stocks and ETFs. It was the first time I had discussed my swing trading strategy for the short side of the market in quite a while because my market timing model only shifted to a new “sell” signal on October 12. Since the first and most important element of our rule-based trading system is to trade in the same direction of the dominant market trend, I simply was not interested in looking for short selling candidates when the broad market was previously in a steady uptrend.

Now, I follow-up that previous post with this short (3-minute) trading strategy video that shows you how to easily and instantly find the best stocks that meet my strict technical criteria as short selling candidates (ie. weak stocks bouncing into resistance, after breaking down below obvious levels of support). Hope you find it useful.

Enjoy the day off from the market...let's hope New York endures the storm with minimal damage.

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Trend Reversal In The Long-Term Treasury Bond ETFs ($TLT, $TMF)

The Direxion 30-year Treasury Bull 3X ETF ($TMF), an index that tracks the performance of long-term US government T-bonds, has been in a long-term uptrend since February of 2011, but has been in an intermediate-term downtrend (correction) off its highs since July of 2012. Now, it appears as though TMF is setting up to break out above resistance of its 3-month downtrend line and resume the long-term uptrend that has been in place for nearly 2 years. The weekly chart below shows the long-term uptrend in TMF, while the daily chart that follows shows the potential breakout above the intermediate-term downtrend line.





In technical analysis, a longer-term trendline holds more weight and bearing over future price direction than a shorter-term trendline. Therefore, if TMF manages to breakout above its 50-day MA, it will have broken out above the downtrend line shown on the second chart, which should enable it to resume its dominant uptrend shown on the first chart.

As an aside, iShares 20+ year Treasury Bond ETF ($TLT) is the regular, non-leveraged version of TMF (which ties up a lot more buying power in one’s account). Normally, we are cautious about entering leveraged ETFs because they frequently underperform the underlying index, but we’ve observed that TMF has been tracking very closely to the price of TLT. Therefore, we are stalking TMF for potential buy entry, rather than TLT, but the latter is basically the same setup.

Over the past few days, we have spent quite a few hours scanning the technical chart patterns of hundreds of ETFs, looking for any ideal opportunities for the coming days. But we were generally not impressed with what we saw. We are listing TMF as a potential “trend reversal” setup (“breakouts” and “pullbacks” are the other two technical setups we trade) only because it is a fixed-income ETF, which has a low direct correlation to the direction of the overall stock market. Otherwise, we remain focused on selling short (or buying inversely correlated “short ETFs”). On the short side, we continue to monitor an internal watchlist of potential short selling candidates. Tickers include PowerShares QQQ Trust ($QQQ) and iShares Nasdaq Biotech ($IBB), both of which we are waiting for a substantial bounce before selling short (or buying the inverse ETF).

On the long side, select emerging markets ETFs are still looking pretty good, and are holding near their recent highs ($EWH, $GREK, $EPHE, and a few others). However, since our market timing model has been on a “sell” signal since October 12, we are presently not interested in buying stock-based international ETFs because they will eventually succumb to weakness if US stocks continue lower from here. Nevertheless, when the broad market eventually bounces, very short-term active traders may independently look to these ETFs as potential quick, momentum-based trades (just be aware they are countertrend to the broad market, which we do not advocate for our swing trading system).

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Why Patience Is Crucial For Short Selling Stocks & ETFs (Trading Strategy)

With the market finally bouncing off its recent lows (as of this moment anyway), it may be tempting to start initiating new short positions in the weakest stocks and ETFs during the recent decline. But I have learned the hard way over the years that patience is crucial when trading on the short side of the market. This 3-minute trading strategy video on YouTube explains and illustrates why.

Hope you find it to be helpful.

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Why Shares Of Apple Are Technically In Trouble This Time ($AAPL, $QQQ)

After just a one-day bounce off its lows on November 1, the Nasdaq 100 Index ($NDX) plunged right back down to pivotal, long-term support of its 200-day moving average just one day later. Why is the Nasdaq displaying such relative weakness to the rest of the major indices? Blame it in no small part on the persistent bearishness and downright ugly chart pattern of Apple ($AAPL), a former market leader and heavily-weighted stock within the Nasdaq 100 Index.

Last Friday (November 2), AAPL sliced through crucial support of its 200-day moving average for the first time since June of 2011. Now, AAPL is also in danger of losing horizontal price support of its prior “swing low” from July of 2012. If it does, it will become the first convincing “lower low” that AAPL has formed in years. As an example of just how negative recent price action has been, notice on the annotated chart below that AAPL plunged 3.3% last Friday, well below its recent low, even though the main stock market indexes still retained a portion of their previous day’s gains. AAPL has become a clear example of a stock exhibiting bearish divergence and relative weakness to the broad market:



Although our bearish analysis will undoubtedly anger the loyal army of Apple fanboys, we are merely being objective by saying that recent price action of AAPL (and quite a few other former market leaders) indicates a changing of the guards is on the horizon. However, the big problem is the replacement guards have not yet arrived. Until new leadership stocks start popping up, there will likely be no impetus for a sustainable broad-based rally. Therefore, if you've been holding AAPL for a while, did not sell on the breakdown, and are still holding out hope that the stock will recover, be warned that you are playing a very dangerous game. We personally view any substantial bounce in the stock as a chance to sell into strength and/or initiate a new short position, as the technical are indicating further downside to come.

The broad-based decline of November 2 put the overall stock market in a rather precarious position. Specifically, each of the major indices will now kick off the week following the formation of a bearish engulfing candlestick pattern. This chart pattern forms when an index or stock opens above the previous day's high, but sells off to close all the way below the previous day's low. This bearish pattern can be clearly seen on the daily chart of PowerShares QQQ Trust ($QQQ), a popular ETF proxy for trading the Nasdaq 100 Index:



As we’ve mentioned several times over the past two weeks, we’ve been monitoring both PowerShares QQQ Trust ($QQQ) for potential short sale entry on a significant rally into resistance. However, the major weakness of November 2 already sent QQQ right back down to near its recent lows. As such, there simply is not a positive reward-risk ratio for selling short this ETF at this time. Nevertheless, we are now targeting ProShares UltraShort Real Estate ETF ($SRS), an inversely correlated “short ETF,” for potential swing trade buy entry going into today. Detailed trigger, stop, and target prices were already provided to newsletter subscribers.

As for the bullish ETFs, a handful of Emerging Markets ETFs continue to hold up well and show relative strength. But as the November 2 price action demonstrated, the broad market simply remains much too weak to attempt any bullish entries right now because current breakout attempts, even in stocks and ETFs with decent relative strength, have a high likelihood of failure. This is typical of overall price action when our stock market timing model is in “sell” mode.

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Market Vectors Coal ETF Heating Up For Swing Trade Buy Entry ($KOL)

Going into today, we’re stalking a new potential ETF buy entry in Market Vectors Coal ETF ($KOL). After being in downtrend from April 2011 until September 2012, KOL is now setting up as a short-term, momentum-based bullish trend reversal play. On the daily chart below, notice that the 20 day moving averages recently crossed above the 50 day moving average, which is a bullish signal, although the 200-day moving average (orange line above the current price) has not yet started sloping higher. Nevertheless, there is a clearly defined area of horizontal price support and daily chart, and the ETF is also formed a pattern that is similar to an inverse head and shoulders.

The head and shoulders chart pattern is bearish when it forms near the highs after an extended rally, and usually leads to new near-term lows. Conversely, an inverse head and shoulders is bullish when it forms around the near-term lows of a protracted downtrend, and will frequently lead to new “swing highs.” On the chart below, we have annotated the components of the inverse head and shoulders pattern. As such, we are adding KOL as an “official” trade setup today (subscribers should note our exact entry, stop, and target prices in the ETF Trading Watchlist section of today's newsletter):



In addition to being an inverse head and shoulders pattern, notice that the right shoulder is higher than the left shoulder. This tells us there were less sellers on the pullback after the formation of the head. A higher right shoulder than the left shoulder with this type of pattern is a bullish indicator. Although this is a trade setup for a long position, the fact it is a commodity ETF means the play has relatively low correlation to the direction of the broad market. Otherwise, we would not be looking at bullish trade setups because our market timing model remains in “sell” mode at the present moment.

Yesterday, our existing long position in Global X Silver Miners ETF ($SIL) got off to a rough start in the morning, but reversed to close near its intraday high, this resulted in the formation of a bullish hammer candlestick pattern that also “undercut” key intermediate-term support of its 50-day moving average. This is exactly the type of price action we actually like to see during periods of consolidation, as it serves to shake out the “weak hands” who typically sell when stocks and ETFs break obvious technical levels of price support. If you happened to miss our initial buy entry, SIL presents a low-risk buy entry on a rally above yesterday’s high (around the $24.45 level).

At the time of this writing, all eyes are focused on the results of the US presidential election. However, we encourage you not to get too wrapped up in the results and its perceived impact on the market. Other than perhaps a short-term, knee-jerk reaction, the winner of each presidential election typically has much less to do with the future direction of the stock market than one may wish to believe. Rather, it is technical analysis and time cycles that really determines the direction of the market’s next move.

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Two New ETF Swing Trade Setups You Can’t Afford To Miss Today ($SKF, $UNG)

Going into today, we are targeting two more ETFs for potential swing trade entry. The first is ProShares UltraShort Financials ($SKF), which is another trend reversal play of a “short ETF.” After forming a month-long base near its multi-year lows, the ETF recently formed a “higher low,” then broke out above intermediate-term resistance of its 50-day moving average on higher than average volume.

As you may recall from yesterday’s ETF analysis, in which we pointed out the breakdown in Select Sector Financial SPDR ($XLF), bearish momentum has started picking up in the financial sector. As such, we are looking to take advantage of this newfound weakness through buying SKF. However, because the ETF has rallied so much over the past two days, we are only interested in buying SKF if it pulls back slightly from its current level (buy limit order). Otherwise, our reward to risk ratio on the trade would be lower than we prefer.

The trade setup and potential entry point is shown on the chart below (regular subscribers should note our exact entry, stop, and target prices on the ETF Trading Watchlist section of today’s newsletter):



The second ETF on our watchlist for potential buy entry today is US Natural Gas Fund ETF ($UNG), a commodity ETF that tracks the price of the natural gas futures contracts.

UNG is now setting up for an ideal re-entry point that is lower risk than last month’s initial buy entry because the ETF has come into intermediate-term support of its 50-day moving average. In addition to trading in a tight, sideways range for the past four days, UNG also formed a bullish engulfing candlestick pattern yesterday, which enables us to have a more clearly defined stop price.

The combination of technical factors above indicates selling pressure has subsided, and the ETF is now positioned to resume its uptrend from the April 2012 lows. The setup for this ETF pullback trade is shown below:



Thanks to our market timing system remaining in “sell” mode (since October 12), we continue to be positioned primarily on the short side of the market (including being long “short ETFs”). Over the past two days, with the main stock market indexes falling sharply, those bearish positions have started working out nicely.

We bought ProShares UltraShort Basic Materials ETF ($SMN) on Nov. 7 and ProShares UltraShort Real Estate ETF ($SRS) on Nov. 5, two inversely correlated ETFs that move in the opposite direction of their underlying indexes. Both were entered as bullish trend reversal plays. Yesterday, SMN gained 2.8% and SRS rallied 1.9%, as both ETFs broke out above key horizontal price resistance levels. This is annotated on the daily charts of these “short ETFs” below:





In addition to SMN and SRS, our position in Direxion 20-Year Treasury Bull 3x ($TMF) also had a great day. Government treasury bonds rallied sharply, enabling our position in TMF to rocket 4.5% higher yesterday. Although it is not a short position or inverse ETF, our ETF trading strategy enabled us to recently buy TMF because it is a fixed-income ETF that is not necessarily correlated to the direction of the stock market. The same is generally true of currency and commodity ETFs, both of which enable investors and traders to have a low correlation to the direction of the stock market, without the need to sell short or buy a “short ETF.”

As you can see on the chart below, TMF has now confirmed its intermediate-term trend reversal, and has convincingly broken out above horizontal price resistance as well:



When will the near and intermediate-term selling pressure in the broad market finally subside? We have no idea, nor does anybody else. But the beauty of following a rule-based trading system is that it really doesn’t matter because we can profit from trends in either direction. Moreover, remember that we are NOT in the business of predicting what the market will do next. Rather, our strategy is simply designed to dynamically react to whatever type of price action the broad market throws at us at any given time.

Developing a mindset to not care about market direction or duration of trends is not easy at first, but once you condition yourself to be indifferent about the market’s direction, or how long a trend will persist, it will definitely ease any level of mental stress or anxiety. In turn, this will enable you to think more clearly and maximize your short-term trading profits.

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How High Will The Nasdaq And S&P 500 Bounce Before Hitting Resistance? ($SPY, $QQQ)

Last week’s bearish price action caused the main stock market indexes to plunge through major levels of technical price support, including key moving averages and prior “swing lows.” Now, those technical levels of prior price support will act as the new levels of price resistance on any rally attempt. This is because the most basic tenet of technical analysis is that a prior level of support always becomes the new level of resistance, after support is broken (and vice versa).

Since last week concluded with a modest rally attempt on November 9, it may have been the start of a significant counter-trend bounce. However, with an abundance of overhead supply now in the broad market, it would not be long before benchmark indexes such as the S&P 500 ($SPX) and Nasdaq Composite ($COMPQ) start running into new overhead resistance levels that could easily stall any decent rally attempt.

In the video below, we use simple and objective technical analysis to highlight pivotal price levels where both the S&P and Nasdaq could run out of gas in the near-term if stocks start bouncing higher in the coming week. Click the link below to watch this short technical analysis video on YouTube:

How High Will The Nasdaq and S&P 500 Bounce? (video)

If you use direct access stock trading software, it may be a good idea to set price alerts for the S&P 500 and Nasdaq Composite at the resistance levels mentioned in the video. Doing so will enable you to be instantly notified when the broad market inevitably enters into a counter-trend bounce and eventually starts bumping into technical resistance levels that will likely be difficult for the broad market to overcome in the short-term.

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Although our market timing system remains in “sell” mode, and our near to intermediate-term focus remains on the short side of the market, it’s never a bad idea to keep an eye on ETFs and stocks that are exhibiting relative strength to the broad market, as these will be the first equities to move higher when the broad market eventually finds support and bounces.

One of the very few ETFs showing relative strength since the two-month selloff in the US broad market began is iShares Xinhua China 25 Index Fund ETF ($FXI). Although the main stock market indexes of the USA have been in a downtrend since mid-September, FXI actually started trending higher just as the domestic markets started selling off. But despite its relative strength, FXI began correcting last week, and is now in pullback mode. However, this is still an ETF to consider buying if the stock market suddenly surprises us with a confirmed buy signal. Looking at the daily chart of FXI below, notice that FXI pulled back yesterday to close right at support of its 200-day moving average, following an extended run up from its October breakout. Support of the 200-day MA also coincides with new horizontal price support form the prior highs:



At the present time, we are NOT looking to buy FXI because the domestic broad market has yet to put in a convincing near-term bottom. Until it does, increasing or persistent bearish momentum in the US markets is likely to hold this ETF in check. Still, FXI should be on your watchlist as one of the first ETFs to consider buying when stocks eventually find a meaningful bottom. Therefore, it has been added to our internal watchlist as a potential long candidate, just in case our rule-based market timing model happens to shift back into “neutral” or “buy” mode any time soon.

High volatility and intraday indecision, such as was exhibited in yesterday’s broad market action, can be nerve-racking and frustrating for short-term swing traders. However, there is one benefit to such price action. Since stocks formed a similar intraday pattern (morning strength followed by afternoon weakness) on November 9, we now have two failed intraday rally attempts within the past three days. The benefit of this is that it makes it easy to adjust protective stop prices on short positions because if the main stock market indexes manage to rally above their three-day highs, bullish momentum will probably move stocks substantially higher in the near-term.

Presently, our model ETF trading portfolio is showing an unrealized gain of approximately $1,100 in trading profits (just over a 2% portfolio gain based on the $50,000 model account value). But because of the price action described above, we have now trailed the protective stops on our ETF and stock positions much tighter, so that we will still lock in substantial trading profit even if the major indices suddenly jump back above their three-day highs. Nevertheless, the weak action of the past three days also means there is an equally good chance that stocks could now tumble to new lows, due to the back to back failed reversal attempts (including the November 12 “inside day”). If that happens, our existing short and inverse ETF positions would realize substantially larger gains, and we would then immediately trail the protective stops even tighter, or look to take profits, the following day.

[morpheustrading]

Why The Stock Market May Be Nearing a Significant Bottom

In the last paragraph of this post (starting with the red text), we will tell you why stocks may now be nearing a significant bottom. But first, let's take a look at another trade setup to put on your radar screen as well as a quick recap on our existing open positions...

After rallying off the summer lows and clearing the 200-day MA in early-September, SPDR S&P Oil & Gas Exploration ($XOP) stalled out after one thrust above the 200-day MA. Over the past few months, the price action has deteriorated, starting with the uptrend line break in late October, which coincided with a break of the 50 and 200-day MAs. The 20-day EMA is now below the 50-day MA, and the 50-day MA is beginning to slope lower. We also see a series of "lower highs" and "lower lows" the past two months, signaling a reversal of the uptrend. At its current level, $XOP is NOT actionable on the short side, but swing traders should add this to their watchlist for potential short entry on a bounce to resistance, in the area of the 200-day MA. This is shown on the daily chart of XOP below:



Earlier today, we sold ProShares UltraShort Basic Materials ($SMN) for a 9.2% gain since our November 7 swing trade entry. Yesterday morning, we sold our swing trade position in Direxion 20+ Year Treasury Bull 3x ETF ($TMF) for a net gain of 6.8% (just over 5 points). The trade setup was initially pointed out on this October 30 blog post. Later in the day, as the market broke down, ProShares UltraShort Real Estate ($SRS) hit our predetermined target price of $27.48. As such, we sold SRS into strength and closed it for a nice gain of 8% since our November 5 buy entry.


Our only recent disappointment was yesterday's price action in Global X Silver Miners ETF ($SIL), which hit our stop price when it fell below the prior day's low. Nevertheless, our stop was in the right place because SIL subsequently sold off another 7% below our exit price by the closing bell. This type of selling action after the ETF broke technical support was a great reminder of the crucial importance of always trading with and honoring your protective stop prices. Losing trades are a normal and unavoidable part of the business, but the only way to be a consistently profitable swing trader is to ensure the losses of your average losing trades are less than the gains of your average winning trades.

We now have three remaining open positions in our model trading portfolio, which consist of one inverse ETFs ($SKF) and two individual stocks on the short side ($COH and $SBUX). With these open positions, each of which is now showing a solid unrealized gain, we have once again tightened the stop prices so that we can protect at least half of the unrealized gains each position is showing (based on Wednesday's close). Regular subscribers of our swing trading newsletter should note our updated stop prices on the "Open Positions" section of today's report. Do not look at these updated stop prices as magical resistance levels that we identified using technical analysis. Rather, we simply placed them just below the half way point of yesterday's wide-ranged candlesticks. They are basically "money stops." If our positions continue moving further in our favor, that's great. But if the price action suddenly reverses, we will still keep the majority of our profits (barring any surprise opening gaps).

For a weak market to form a significant bottom, there typically needs to be at least one or two days of panic selling, where investors finally give up and just want to sell at any price. It seems as though Wednesday's action might have been the beginning of such a move, as there isn't much out there that is still holding up. Our nightly scans for new short selling setups have dried up this week, as most sector ETFs have already been hit hard and are now too extended to offer low-risk entry points. Because of this, we will continue to lay low with regard to new positions and just focus on managing our existing winning trades.

[morpheustrading]

Why We Are Happy To Be In “SOH Mode” Right Now (Trading Psychology)

In yesterday’s (November 15) blog post, we said the stock market may be nearing a significant short-term bottom because Wednesday’s price action resembled the start of panic selling that typically precedes exhaustion in a downward trend. However, given yesterday’s relatively tame price action, the stock market may still need more time to wash out the last of the remaining bulls…or maybe not. So, what plan of action does this provide us with? It comfortably puts us into “SOH mode” (sitting on hands). In swing trading, sometimes the best plan of action is doing absolutely nothing. In this educational trading psychology article, we explain why.

After shifting from “buy” mode to “neutral” mode on October 5, then from “neutral” to “sell” mode on October 12, our rule-based system for market timing once again precisely got us out of the long side of the market within a few percent of the highs, then prompted us to sell short (and buy inverse ETFs) right as the current sell-off began. However, even though our market timing system is still in “sell” mode, as it has been since October 12, we are now in a situation where the reward to risk ratio for entering new short positions at current levels is simply not positive.

Extremely short-term traders (such as daytraders) may now be looking for entry points to go long (buy) the stock market, with the goal of profiting from a near-term counter-trend bounce to the upside. However, as professional swing traders, we are not interested in trying to pick a bottom because our stock trading strategy is NOT designed to catch every “nook and cranny” of price movement in the stock market.

Instead, the combination of our stock trading system and market timing model is designed for us to only trade in the direction of the dominant market trend and seek to capture the “meat” of every significant move in either direction. This means we are not concerned with selling at the absolute top of market rallies, nor buying at the dead lows of downtrends. Once in a while, we get lucky and this actually happens, but it is never our intention because focusing on precisely nailing the tops and bottoms of market trends is simply too risky of a trading methodology. Think of our overall stock trading system as being designed to take large bites out of the middle of a sandwich, but not eat the crust.

When our market timing model is in “buy” mode (as it was from August 16 to October 5 of this year), we exclusively buy stocks and ETFs on the long side of the market. This means we view normal, short-term pullbacks in uptrending stocks as buying opportunities to enter new long positions; our trend-following system does NOT allow us to sell short quick pullbacks of strong stocks and ETFs in an uptrending stock market. Instead, we simply focus on selling long positions into strength of each major upward thrust, then reverting back to cash while waiting for stocks to pull back and set up for the next low-risk buying opportunities.

The same is true of how we trade in downtrending markets, except in reverse. For example, now that the broad market is in a confirmed downtrend (at least two “lower highs” and “lower lows” have been set), we are NOT interested in going long (buying) counter-trend bounces into resistance of downtrending stocks. Rather, we prefer to keep our powder dry by waiting in cash for ETFs and stocks to rally into new resistance of key moving averages and prior lows, then initiate new short positions (or buy inverse ETFs after they pull back to support). This will remain the case until we eventually receive the necessary proprietary signals for our market timing system to revert back to “buy” mode.

If you are new to swing trading, you may feel the urge to be actively trading the stock market at all times, either on the long or short side. However, the most profitable stock traders we know are actually out of the market more than they are in the market. But when the proper technical signals line up, the reward to risk ratios are good, and entry points are low-risk, successful traders take action and aggressively trade in the direction of the dominant market trend. This is exactly what we have done over the past several weeks, and with winning results.

On November 14, we closed several ETF swing trade positions for a substantial net profit. One day later (yesterday), we closed our remaining two open ETF positions. ProShares UltraShort Basic Materials ETF ($SMN) rallied to our target price, so we sold and locked in a 9.2% gain with just an 8-day holding period. Subsequently, ProShares UltraShort Financial ETF ($SKF) pulled back and hit our adjusted stop price, which knocked us out of the swing trade with a decent gain as well.

Mid-way through November, we have closed six ETF trades so far this month. Four of the six trades were winners, equating to a net gain in our $50,000 model ETF trading portfolio of more than 2% (approx. $1,100). During this same time period, the Nasdaq Composite has lost 4.7%. This means, the ETF trades in our Wagner Daily newsletter have outperformed the Nasdaq by nearly 7% over the past two weeks alone. On the individual stock side, we still have two open short positions. $COH short is showing an unrealized gain of 5.7% since entry, while $SBUX short is presently 4.1% in our favor. We will be taking profits on both swing trades on today’s open (approximately 1.7% net gain based on the $50,000 model stock trading portfolio).

We are now back to 100% cash in our model trading portfolios, which is a great place to be considering the current price levels of the market. There is not yet any technical reason to assume the broad market has formed a significant bottom, but it is equally risky to enter new short positions right now because stocks are due for a substantial bounce (the Nasdaq is on pace for its sixth consecutive week of losses). Now that we are flat, our plan is simply to wait for the broad market to bounce into resistance, then initiate new short positions and/or buy inverse ETFs (as previously explained). After having locked in solid gains on a string of winning ETF trades over the past few days, we are now “Flat and Happy,” patiently waiting in SOH mode for the stock market to provide us with our next low-risk swing trading opportunities.

If you are not a newsletter subscriber and have been losing money in recent weeks, we highly suggest you pause and take the time to do an honest, personal reflection of what you did wrong. Were you fighting the dominant market trend? Were you clinging to long positions that should have been sold weeks ago, but you ignored the stops? These are the types of questions you need to ask yourself if you have been losing money lately. Unless you learn from your mistakes and devise a way to prevent repeating them, you will never be a successful trader. Without taking the time for honest self-reflection when losing money, you will not even be aware of any trading mistakes are making.

[morpheustrading]

How To Profit From Swing Trading “Short ETFs” (Trading Strategy Video)

In the stock trading strategy video below, we do an educational technical review of an actual swing trade in ProShares UltraShort Basic Materials ETF ($SMN), an inversely correlated “short ETF,’ which we bought November 8 and sold on November 15. Upon closing the swing trade, we had scored a solid 9.2% gain on an 8-day swing trade.

In this 3-minute video, you will learn the specific technical analysis signals that prompted us to buy this “short ETF,” which has recently reversed its primary downtrend. For best quality, play the video below and click on the bottom right corner of the video player window to view in full-screen mode:

How To Profit From Swing Trading "Short ETFs" (Trading Strategy Video) - YouTube

As discussed in the video, many traders fail to successfully trade on both sides of the market because, even if they have the right technical chart patterns, they simply buy or sell at the wrong time. Following a proven, objective system to indicate the proper timing for buying or selling ANY stock or ETF in the market is one of the most critical elements that determines whether or not a trade will be profitable.

Although the stock market has sold off sharply in recent weeks, adhering to the signals of our rule-based market timing system has enabled subscribers of our nightly stock picking service to realize substantial profits from swing trading ETFs and stocks on the short side (combined with buying "short ETFs").