With leading stocks getting punched in the face over the past week (especially the past two days), there isn’t much to get excited about on the long side of the stock market right now, despite oversold market conditions.
During each market pullback in 2013, money rotated out of extended stocks and into those breaking out from quality basing patterns.
But this time around, we are not seeing the same type of patterns as we did last year, as many more individual stocks have broken down below key support levels.
When ETFs Are The Best Bet
In strong and persistent bull markets, we primarily focus on trading leading growth stocks because they provide much more alpha than ETFs.
As such, our stock trades usually outperform the gains of our ETF trades in raging market uptrends.
But the reason we trade both stocks and ETFs in our swing trading newsletter is because select ETFs can really shine as excellent trading vehicles when the stock market is under correction or in a downtrend.
ETFs are quite useful when broad market conditions turn sour because they enable us to scan various asset classes (commodity, currency, fixed-income, etc.) to locate the next trend that is largely uncorrelated to the direction of the stock market.
The Euro ETF – No FOREX Experience Required
Earlier this week, we mentioned to subscribers that we are stalking iShares Long-term T-bond ETF ($TLT) for potential buy entry, and that bond ETF remains on our internal watchlist.
Now, we are also monitoring CurrencyShares Euro Trust ($FXE) for a low-risk pullback buy entry.
An exchange-traded product that tracks the price of the euro, $FXE is setting up nicely as a potential intermediate-term swing trade (position trade) due to its bullish confirmation on multiple time-frames (see this blog post to learn how multiple time-frame analysis works).
After analyzing $FXE on its monthly, weekly, and daily charts, you will surely agree this is a great ETF to monitor for potential buy entry in the coming days, especially considering its virtually nil correlation to the direction of the US equities markets.
$FXE – Monthly Basing Action
As shown on the monthly chart below, $FXE has been in consolidation mode since the beginning of 2013, after stalling out from a rally off the lows at $135.
The price action over the past 15 months has been bullish, especially the tight range that has formed over the past few months. Take a look:
Looking at the current monthly candlestick, notice that $FXE failed to breakout above the monthly downtrend line earlier in the month.
However, a false breakout is typically a good thing during a bullish consolidation.
A few false breakouts and shakeouts along the way washes out the weak hands, which creates demand at higher prices because those who sold are forced to buy back in or miss the next move higher.
$FXE – Multiple Weekly Support Levels
Zooming in to the shorter-term weekly chart pattern below, we see the price action has pulled back into key support of its 10-week moving average (similar to the 50-day moving average), but still may need another week or two to produce a low-risk buy entry point.
If the price action fails to hold at the 10-week moving average (“A”), then a touch of the uptrend line (“B”) would also be a very low-risk entry because the prior swing lows are likely to hold.
Depending on how long such a pullback would take to play out, the rising 40-week moving average (orange line) may also end up converging with support of the weekly uptrend line.
$FXE – Looking For Entry On The Daily
Finally, upon drilling down to the daily chart, notice the price is just above the rising 50-day moving average:
$FXE – The Buy Setup
From here, the most ideal entry would consist of an “undercut” of the 50-day moving average, followed by a wide-ranged bullish reversal candle.
Such an entry point would provide us with an extremely positive reward-risk ratio with a clearly defined stop price.
However, we do not always have the luxury of the price providing us with the most ideal entry point.
Nevertheless, even if the best scenario does not play out, we at least want to see some type of bullish reversal candle before buying because it would confirm near-term momentum has returned to the bulls.
In turn, we would subsequently expect the next move up in $FXE to convincingly break out above the long-term monthly downtrend line.
As always, subscribing members of The Wagner Daily will be provided with our preset and exact entry, stop, and target prices for this ETF trade setup if/when it meets our specific criteria for buy entry.