Going into today (November 27), I am monitoring ProShares UltraShort Real Estate Index ETF ($SRS), an inversely correlated “short ETF,” for potential swing trade buy entry. As shown on the annotated daily chart below, I will buy SRS for new swing trading entry only if it trades back above the November 26 high:
Notice that the November 26 low in SRS corresponded with support of its multi-month uptrend line from the September low (blue color). Notably, this uptrend line is also converging with key intermediate-term support of the 50-day moving average. Additionally, SRS just “undercut” a major level of horizontal price support (black line), which is bullish because it absorbs overhead supply by shaking out the “weak hands.”
If SRS now moves back above its November 26 high, it will be trading back above key horizontal price support, which would also put it back above near-term technical support of its 20-day exponential moving average. Most importantly, there is now a low-risk entry point for ETF swing trading buy entry on this pullback setup, as a protective stop price can be neatly placed just below the obvious levels of support below below the uptrend line and 50-day moving average (plus some “wiggle room”).
Because the broad market is still attempting to recover off its November 16 lows, I view this swing trade setup as a short-term, momentum-based trade. As such, the general area for my target price is resistance of the prior highs from mid-November ($28.15 area). Even though the upside price target may not be huge, the relatively tight stop price still provides me with a 2 to 1 reward-risk ratio on this short-term trade setup, which is ideal for sound risk management.
The bullish price action of November 23, in which the broad market formed a bullish “accumulation day,” caused my system for market timing to generate a fresh “buy” signal. However, the stock market still has a lot to prove before it is safe for swing traders to aggressively jump back on the long side of the market with full sized positions.
Specifically, there needs to be the development of fresh leadership developing an individual stocks, as well as a lack of “distribution days” (higher volume selling) over the next five days. Furthermore, both the Nasdaq 100 Index ($NDX) and small-cap Russell 2000 indices ($RUT) are now forced to contend with major overhead price resistance levels, such as their 200-day moving averages and/or downtrend lines from their September 2012 highs. This could result in a sharp and sudden pullback in the coming days, which could shake out early buyers of the recovery off the lows, while absorbing overhead supply at the same time.
Overall, I am now scanning for potential swing trade buy entries that have shown clear relative strength during the market’s recent decline, as these would be the first breakout candidates to buy. Simultaneously, I am looking for select ETFs to swing trade on the short side of the market (and/or buy inversely correlated “short ETFs” such as $SRS).
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