Why S&P Homebuilders SPDR ($XHB) Is Setting Up For An ETF Swing Trade

Since the stock market formed at least a near-term bottom in mid-November, the strongest ETFs in the US markets have been international ETFs. Specifically, a majority of emerging markets Asian ETFs, including China ($FXI), Thailand ($THD), Philippines ($EPHE), are all trading at fresh 52-week or multi-year highs, even as the S&P, Nasdaq, and Dow struggle to simply reclaim their prior highs from September of this year. Additionally, several European ETFs, such as Turkey ($TUR) and Poland ($EPOL), have also been surging to new highs.

Although international ETFs have been outperforming the broad market, there has been a lack of leadership among US industry sector ETFs. Most have been following, or even lagging behind, the S&P, Nasdaq, and Dow. But one industry sector ETF showing potential for a breakout to new highs in the near-term is S&P Homeuilders SPDR ($XHB).

Showing considerable relative strength since the broad market began its decline off the September highs, $XHB is now trading near its five-year high. The ETF briefly “undercut” horizontal price support in mid-November, right before the major indices formed a near to intermediate-term bottom. Since then, its price action has been uninspiring, choppy and seemingly noncommittal. However, $XHB is now building a “pennant” formation that could soon lead the ETF to breakout to another fresh 5-year high. The current pennant of $XHB is shown on the daily chart pattern below:

Looking at the chart above, notice that $XHB recently formed a lower high, followed by a higher low, which forms the anchor points of the trend channel of the pennant. Next, we must look for the price action in this ETF to tighten up, while still remaining within the confines of the “pennant.” If price action tightens up (volatility contraction), combined with declining volume, the first substantial breakout to the upside would present a potential swing trading buy entry for this ETF trade setup.

Although recent price action on the daily chart may look unimpressive, looking at the longer-term weekly time interval usually provides a better perspective on the “big picture” of what is really happening with regard to the overall trend of an ETF. When looking at the weekly chart below, notice that the choppiness of the past several months now appears more as a consolidation near its 5-year high:

Since $XHB is still near the lower channel support of its pennant, and price action is still a bit wide, it is too soon to have a valid ETF trade entry point right now. However, this ETF should definitely be put on your radar screen as a potential breakout entry if the broad market holds stable in the coming days and weeks.

As the holiday season draws nearer, overall volume levels are expected to dry up. When turnover slides below 50-day average levels, both ETFs and individual stocks are more susceptible to erratic, whipsaw price action.

If you’re a new trader, don’t underestimate the importance of having solid turnover levels in the market, as volume is the fuel that enables trends to become firmly established. Without it, noncommittal, choppy sessions are common. Therefore, despite yesterday’s (November 11) breakout action in several of the main stock market indexes, I caution against becoming overly complacent or aggressive with share size at current levels. Keep in mind that the market timing system I follow has been in “buy” mode since November 23, but the technical signals have not yet been generated to cause the timing system to shift to “confirmed buy” mode.

An ETF Swing Trade With A Low-Risk Trading Strategy ($SKF)

Stocks took a breather yesterday (November 27), as the main stock market indexes pulled back on higher volume. The Nasdaq Composite, S&P 500, and Dow Jones Industrials slipped an average of 0.5%. Both the small-cap Russell 2000 and S&P MidCap 400 indices edged 0.2% lower. Considering the sharp move off the November 16 lows, a bit of a pullback was not surprising. However, one concerning element of yesterday’s price action is that the decline occurred on higher volume. With turnover in both the NYSE and Nasdaq registering about 10% higher than the previous day’s levels, yesterday was a “distribution day” that was indicative of stealth selling into strength among banks, mutual funds, hedge funds, and other institutions.

Although the market timing system I follow (click here for details) generated a new “buy” signal at the close of trading on November 23, I have said over the past several days that the new buy signal needed to be confirmed in order to have validity of a significant bottom being formed. For that to happen,  there needed to be the emergence of fresh leadership among select individual stocks, as well as a lack of higher volume selling (“distribution days”) this week. But there remains a lack of impressive breakouts among leading stocks, as well as the occurrence of yesterday’s higher volume selling. Furthermore, don’t forget that several of the main stock market indexes have just run into major technical levels of overhead price resistance.

Since the buy signal is not yet confirmed, my stock trading strategy indicates it is fine to selectively continue selling short ETFs and individual stocks with bearish chart patterns and relative weakness (albeit with reduced share size as well). Yesterday, my swing trade setup in ProShares UltraShort Real Estate Index Fund ETF ($SRS), an inversely correlated “short ETF” triggered for buy entry by rallying above the previous day’s high. Now, I’m adding another inversely correlated ETF to my watchlist for potential buy entry in today’s session.

Now, I am targeting the inversely correlated ProShares UltraShort Basic Financials ETF ($SKF) for potential swing trade buy entry. Like $SRS and $SMN, $SKF was the third inversely correlated ETF trade recently profited from by buying the early November breakout above resistance, then subsequently selling into strength near the mid-November highs. Now, the technical chart pattern of $SKF is presenting me with a low-risk pullback buy entry going into today’s session. Take a look:

Similar to the other two inversely correlated ETFs mentioned above, $SKF “undercut” horizontal price support two days ago, but quickly snapped back above that level of support in yesterday’s session. Notice how the ETF is now trading back above its 50-day moving average, as well as its horizontal price support. Furthermore, volume of $SKF in yesterday’s session was approximately double its 50-day average level. This tells me there was institutional buying interest, which could aid in sending the ETF back up to test its prior highs over the next one to two weeks (accordingly, the underlying financial sector is poised to move lower). With this setup, my trading strategy allows for a clearly defined stop price just below the three-day low.

Watch this “Short ETF” For Potential Swing Trading Entry ($SRS)

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).

To learn how to trade stocks with a “no hype” trading system that simply works, you may wish to check out the popular ETF and stock trading blog at http://www.morpheustrading.com/blog.

Selling Short A Biotech ETF For Swing Trade Entry ($IBB)

In this October 26 post here on this trading blog, I originally pointed out that iShares Nasdaq Biotechnology Index ($IBB) was setting up for potential short sale entry, and I annotated the chart to show where a legitimate short sale entry point may be found. However, because IBB was showing so much relative weakness, it never bounced to trigger our short entry point, and just plunged lower instead.

After several weeks of sharp, persistent selling pressure, IBB has finally come into major long-term support of its 200-day moving average, and is now in the process of developing a counter-trend bounce. On its current chart pattern below, I have annotated a potential short sale entry point if the bounce continues::

Although IBB was a market leader throughout most of 2012, it very quickly began showing relative weakness and became a loss leader after the ETF began correcting in early October. Now, it is bouncing off support of its 200-day moving average, and I am hoping it will have enough bullish momentum in the coming days for it to probe above resistance of its 20-day exponential moving average, and to near resistance of its 50-day moving average.

If it does, it will present swing traders with an ideal, low-risk short selling entry point, in anticipation of another move down to at least re-test the prior lows of a few days ago. IBB is not yet on our watchlist as an “official” short entry, but I will be monitoring its price action for potential short sale entry point if it provides a proper, low-risk trade setup.

Additionally, don’t forget that I continue to monitor PowerShares QQQ Trust ($QQQ) for potential short sale entry if it manages to put in a substantial bounce that “overcuts” its obvious levels of price resistance. A review of that swing trading short setup, which was posted on this trading blog yesterday, can be found here.

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Short Selling Pick – iShares Real Estate ETF ($IYR)

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.

Short selling entry on $QQQ

After oscillating in a choppy, lethargic range for five straight days, the major indices made a substantial move yesterday, as each index climbed at least one percent. Stocks gapped higher on the open, rallied throughout the morning, then consolidated near their intraday highs throughout the rest of the session. The Nasdaq Composite ($COMPX) jumped 1.4%, the S&P 500 Index ($SPX) 1.1%, and the Dow Jones Industrial Average ($DJIA) 1.0%. Showing quite a bit of relative strength, the S&P Midcap 400 Index ($MID) zoomed 2.4% higher, but the small-cap Russell 2000 curiously increased only 1.1%. It is unusual for there to be such a large price divergence between the small and mid-cap indexes.

Unfortunately for the bulls, yesterday’s rally lacked the convincing punch of institutional trading activity. Total volume in the Nasdaq managed to increase 3%, but turnover in the NYSE was 3% lighter than the previous day’s level. Nevertheless, trade remained above 50-day average levels in both the Nasdaq and NYSE. In both exchanges, advancing volume exceeded declining volume by a ratio of approximately 4 to 1. This obviously indicated positive breadth in the market, but the ADV/DEC volume ratio was not extreme.

On the surface, yesterday’s large percentage gains of the main stock market indexes may seem encouraging, or even impressive, to the casual observer. However, it is important to keep yesterday’s bounce in perspective with the degree of the overall decline in the latter half of September and throughout the month of October. For example, PowerShares QQQ Trust ($QQQ), a popular ETF proxy for the Nasdaq 100 Index, fell 7.8% from its September high down to its October low (based on closing prices). Therefore, yesterday’s 1.7% rally in QQQ means the Nasdaq 100 is still sitting within the bottom 25% of its peak to trough range over the past six weeks. Put another way, yesterday’s stock market advance was technically nothing more than an overdue bounce off the lows. This, of course, does not mean yesterday’s rally could not go on to be the start of an eventual upside trend reversal, but one mere day of price action, no matter how bullish or bearish, does not make a new trend.

Overall, our near-term plan remains the same as we’ve mentioned several times over the past week, which is to view any significant market bounce as an opportunity to initiate new short positions on the weakest ETFs as they approach new overhead resistance levels. One of the ETFs we are monitoring for an ideal short sale entry point is indeed QQQ. On the annotated daily chart of QQQ below, notice that yesterday’s (November 1) rally followed an “undercut” of major support of its 200–day moving average, which provided the perfect technical excuse for a bounce. Our ideal zone for selling short QQQ on a bounce (or buying an inversely correlated “short ETF”) is labeled on the following chart:

Although the chart of QQQ shows the most ideal price levels for selling short, there is obviously no way of knowing if the market will cooperate with us. Given the kind of weakness that we’ve seen lately, including continued relative weakness in key large-cap tech stocks like Apple ($AAPL), it would not be surprising if there is minimal upside follow-through on yesterday’s bounce. But even if there are further gains to be had in the coming days, and these ETFs manage to bounce into our target area for selling short, we still will not blindly initiate new short positions the instant these ETFs first touch resistance. Rather, we then need to wait for the proper signal to sell short, such as a bearish reversal candle or a significant opening gap down that follows any bounce into resistance. To learn more about a winning trading strategy for swing traders, check out this trading blog: http://www.morpheustrading.com/blog

 

Potential Swing Trading Entry In iShares Nasdaq Biotech ETF ($IBB)

Based on my rule-based ETF and stock trading strategy, the most ideal short selling candidates for swing trading entry are stocks and ETFs that have broken down below major levels of price support, such as the 50-day moving averages, set new “swing lows” (or is testing prior lows), and have subsequently bounced into major resistance over a period of three to ten days. Note that I do not sell short stocks or ETFs as they are breaking down below obvious levels of support, as they tend to rebound and rip higher after just one to two days of weakness.

One industry sector ETF on my radar screen for potential short entry in the coming days is iShares Nasdaq Biotechnology ($IBB). As you can see on the annotated chart below, $IBB has recently broken down sharply below its 50-day MA, so I am now waiting for the bounce into new resistance of that 50-day moving average:

As recently as one month ago, IBB was actually a leading ETF that had been showing relative strength to the broad market throughout all of 2012. However, when market conditions rapidly deteriorate, former leading ETFs and stocks often correct to a greater degree than the broad market. In the case of IBB, the recent correction off its highs has been ugly, and we believe the ETF will correct substantially lower in the near to intermediate-term. For short selling, a downside target that “undercuts” the rising 200-day moving average is realistic, as the longer-term weekly chart shows substantial support from the prior base of consolidation just below the $128 area.

Accurate timing for entry points is even important on the short side of the market. Again, rather than selling short the initial move lower (very risky), I prefer to wait for the first substantial bounce that follows a key breakdown below an obvious level of support. With IBB, I am looking for a bounce that tests new resistance of the 50-day moving average (the teal line). The 20-day exponential moving average is now sloping sharply lower as well, and should soon form a bearish crossover below the 50-day moving average. This would provide additional resistance.

If IBB provides the bounce I am looking for, I will then look to sell short on the first bearish reversal bar or opening gap down that follows. Even though I prefer to wait for a bounce into resistance before entering a new short position, it is important to realize I do not enter a new short position while the stock or ETF is still bouncing (trying to catch the high of the bounce). Rather, I 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. Given that the broad market may technically be due for a bounce in the coming days, I anticipate IBB to bounce as well.