As part of my short-term trading strategy, I prefer to sell short stocks and ETFs only after they’ve fallen down below a clear level of technical support, then bounce into an overhead area of resistance and form a bearish reversal pattern, such as gapping lower on the open or a “shooting star” candlestick.
One such ETF I came across in my nightly stock scanning that meets the criteria for a low-risk short selling entry is iShares Dow Jones US Real Estate Index ETF ($IYR). I have annotated this ETF swing trade setup on the daily chart of IYR below:
After rebounding off key support of its 200-day MA on Oct. 26, IYR bounced back above resistance of its 20-day EMA (the beige line) on Nov. 2. However, the ETF formed a bearish reversal bar that same day by moving substantially above its opening price, but reversing to fall back down to near the price it opened. Additionally, more substantial intermediate-term technical resistance of its 50-day MA is now just above the high of November 2. Additionally, the 20-day moving average crossed below its 50-day MA, which is a bearish pattern. All these factors come together to make for an ideal entry point for short sale entry into IYR going into today’s session.
Specifically, I am looking for a short entry point into IYR if it moves below its November 2 low, which would also put the ETF back down below its 20-day exponential moving average. A clearly-defined stop could then be placed above resistance of the prior “swing high” from October 19 (where resistance of the 50-day moving average stopped the rally attempt dead in its tracks). As for a price target, I would anticipate that the next move down will lead to a breakdown that at least “undercuts” the 200-day moving average by 1 or 2% before the ETF attempts to bounce higher again. Looking at the longer-term weekly chart interval, one would quickly notice that IYR could fall a lot further in the intermediate-term.
If you trade stocks and ETFs in a non-marginable cash accounts, such as an IRA accounts, you will not be able to sell short IYR because doing so requires a marginable account. However, one alternative is to instead consider buying ProShares UltraShort Real Estate ETF ($SRS), an inversely correlated “short ETF.” If you flip the chart of IYR upside down, you will notice the chart pattern of SRS is very similar (but not exactly the same). The pattern of SRS is slightly different because both “short ETFs” and leveraged ETFs frequently underperform the actual underlying index they are supposed to track, when held over longer holding periods. However, since I am considering buying SRS only as a quick, momentum-based trade, the percentage of underperformance is not likely to be very significant. Still, if you are a trader with a marginable account, you are therefore able to actually sell short. If this is case, selling short IYR would probably be preferable to buying SRS.
To learn more about the short-term trading strategy discussed in this post, check out the best stock trading blog by clicking here.
Swing Trading - Best ETF & Stock Picks 