Immediately after our market timing model shifted out of “Buy” mode (just one day before the Nov. 7 sell-off), we changed our focus from buying leading individual stocks to trading ETFs with a low correlation to the direction of the broad market (commodities, currencies, fixed-income, etc).
While our most profitable momentum trades in healthy bull markets are typically realized from small to mid-cap growth stocks, we strongly believe that trading ETFs is better than stock trading in flat or choppy markets (due to the various asset classes available).
That’s why we swing trade both stocks and ETFs, the ratio of which is dynamic and dependent on market conditions.
Yen Trend Reversal ($YCS)
Going into today, we are stalking a potential short entry in the Japanese yen through buying ProShares UltraShort YEN ($YCS), an inversely correlated currency ETF.
After several months of consolidation, the price action in $YCS has tightened up considerably in recent weeks.
On the chart below, notice how the distance from each swing high to swing low has tightening up (compared to the volatility of June and July):
On November 7, $YCS had a very wide-ranged decline (not shown on the weekly chart), but the price immediately snapped back the following day. This “shakeout” enabled the ETF to clear back near its high of the week.
That price action caused a bullish reversal candlestick to form on the weekly chart (highlighted in yellow), and volume ticked higher as well.
Now, $YCS is back above both its 10 and 40-week moving averages, as it pops its head above resistance of a 6-month downtrend line on increasing volume and with a bullish reversal pattern.
A move above last week’s high should spark bullish momentum that causes $YCS to rally towards its May 2013 high in the coming weeks.
Getting Physical With Palladium
Another ETF we are stalking for potential buy entry this week is Physical Palladium Shares ($PALL), a commodity ETF.
Although gold and silver ETFs have been uninspiring and chopping around near their lows for many months, this palladium ETF is a precious metals ETF that is actually showing relative strength and on the verge of a breakout.
For starters, $PALL broke above its weekly downtrend line on higher volume last week (on November 6). The 10-week moving average also recently crossed above the 40-week moving average (which is now beginning to trend higher as well):
As with $YCS above, $PALL was volatile and marked by wide swings in the first few months it attempted to build a base of consolidation, but the price action of this palladium ETF has been contracting since July:
Within the next few days, we expect $PALL to either clear last week’s highs and test the highs of 2013, or potentially chop around for a few more weeks in a tight range before breaking out.
If $PALL breaks out and momentum kicks in gear, a realistic upside target is the area of its 2011 highs, about 15% above the current price.
As previously mentioned, what we really like about both $YCS and $PALL is that these ETFs have little to no correlation to the direction of the main stock market indexes.
Since we are no longer on a short to intermediate-term “buy” signal, these ETFs offer an excellent way to continue swing trading on the long side of the market, but without the risk of being tied to further downward movement of the main stock market indexes.
Going into today, subscribers of our Wagner Daily swing trading newsletter should note our predefined and exact trigger, stop, and target prices for both $YCS and $PALL in the “watchlist” section of today’s report.
To learn more about the benefits of trading both ETFs and stocks in your portfolio, check out this informative article (which was actually written by one of our long-time subscribers).