In uptrending markets, a vast majority of our ETF trading entries are Breakouts to new highs and Pullbacks to near-term support levels of strongly trending ETFs. However, we sometimes take advantage of Trend Reversal swing trades for quick, momentum-based “pops.” An example of this is our recent winning trade of an 8.5% gain in DB Gold Double Long ($DGP), which we bought after it broke out above both its 200-day moving average and one-year downtrend line. Now, another potential Trend Reversal play is setting up in iShares Hong Kong Index ($EWH), an international ETF.
Starting with the weekly chart, you will see that $EWH is testing resistance of a downtrend line that has been in place since early 2011. It has also formed two “higher lows” since then, which are annotated on the chart below:
When buying Trend Reversals, we never try to catch the absolute bottom because it is risky and foolhardy. Rather, we prefer to see sufficient confirmation that a significant bottom has formed before attempting to buy. The two “higher lows” on the weekly chart above are positive because it indicates key bottoming action. However, it is also important to look for confirmation of intermediate-term trend reversal on the shorter-term daily chart interval. For this, we need to see that the 20-day, 50-day, and 200-day moving averages have all begun to slope higher. Finally, we need to ensure that the 20-MA is above the 50-MA, and the 50-MA is above the 200-MA. Typically, it takes at least several months from the absolute lows for these events to occur. In the case of $EWH, it also meets these requirements on the daily chart. Take a look:
Because yesterday was the first day of price correction in the broad market since last week’s breakout, we are not yet listing $EWH as an “official” ETF trade setup on our trading watchlist today. Nevertheless, it is now on our radar screen and we will report our exact entry, stop, and target prices to subscribers of our ETF and stock picking newsletter if we decide to target $EWH for new trade entry.