Direxion Small Cap 3x Bear ETF ($TZA) on the verge of breaking out

Stocks showed promise at the open yesterday morning, but a late wave of selling on higher trade subsequently pulled the markets down to session lows. For a second consecutive day, all the major indices finished in negative territory. Larger cap issues showed the most weakness on the day, with the Dow Jones Industrial Average losing 0.5% and the S&P 500 losing falling 0.6%. The S&P MidCap 400 slid 0.4%, while the Nasdaq and the small-cap Russell 2000 fell 0.3% and 0.2% respectively.

Market internals were bearish on Tuesday. Volume spiked by 9.7% on the Nasdaq and 11.7% on the NYSE. Declining volume easily outpaced advancing volume on both exchanges. On the NYSE, the adv/dec volume spread ratio finished at negative 3.7 to 1, and was negative by just over 2 to 1 on the Nasdaq. The combination of higher volume and negative volume spread ratios tells us mutual funds, banks, hedge funds, and other institutions were in sell mode yesterday.

The Direxion Small Cap 3x Bear ETF ($TZA) is on the verge of breaking out above a major resistance level, as annotated on the chart below. A rally above yesterday’s (May 15) high of $20.98 could provide a buying opportunity for a near-term trade in this inversely correlated ETF. As with all “short ETFs,” which typically underperform their underlying indexes with longer holding periods, this swing trade is only intended to be held for a quick “pop” of no more than a few days (as opposed to our typical holding time of 1 to 3 weeks). Regular subscribers of The Wagner Daily ETF and stock newsletter with our best daily stock picks should note the “watchlist” section below for our exact entry, stop, and target prices on the $TZA trade setup (as well as two other trade setups today). The technical trade setup for TZA is shown on the daily chart below:

Yesterday, on a burst of volume, the Market Vectors Retail ETF ($RTH) formed a bearish reversal candle as it rallied to test resistance of its 50-day MA before fading into the close. Now, a volume-fueled move below yesterday’s low of $40.90 could provide a potential short sale entry trigger for this ETF:

Yesterday, the $SOXS trade setup hit its trigger price and we entered the trade. Although $SOXS was under pressure for much of the session, the late-day weakness in the broad market propelled this ETF to close at its intraday high, as well as its highest closing price of the past four months. So far, this near-term “trend reversal” setup is shaping up nicely. Recall this is actually a re-entry into $SOXS because we already locked in a nice profit at the beginning of this month (bought the pullback to the 20/50-day MA convergence, then quickly sold into strength a few days later).

Based on yesterday’s price and volume action in the broad market, as well as the inability of stocks to hold their morning rally attempt, more near-term downside could be in store. With the exception of the S&P MidCap 400 Index, all the major indices have fallen below support of their prior lows from April, resulting in the formation of new “swing lows.” If the stock market is unable to recover quickly on this morning (May 16), we could see a significant round of selling momentum in the near-term.