In last week’s report, we mentioned the relative strength in Direxion Daily China Bull 3x Shares ETF ($YINN). $YINN continues to impress, holding above the 10-day MA since regaining the 50-day MA on July 11. The split daily chart details the pattern relative strength in $YINN (top chart) vs. $SPY.
After an ugly gap down from a false breakout to new swing highs on 8/7, the Guggenheim Solar ETF ($TAN) is trying to hold the 50-day MA or 10-week MA on the daily chart. If the price action can hold above the $25 – $26 level, then we may look to add back the shares we stopped out of last week. Ugly selling action in First Solar Inc ($FSLR) has been a drag as of late, as it carries a 10% weighting in $TAN. We’d like to see $FSLR at the very least hold above the 200-day MA over the next two weeks.
In yesterday’s report we mentioned the recent money flow into precious metals, and the relative strength in iShares Silver Trust ($SLV) over SPDR Gold Trust ($GLD), due to the strong separation from the 10-week MA and heavier volume in $SLV. With $SLV stalling stalling out the past two sessions, we could potentially see a bull flag type pattern emerge by the end of the week on the daily chart. Rather than buying $SLV, we are going with the 2x leveraged, ProShares Ultra Silver ETF ($AGQ). The daily chart below details the potential setup with our ideal price action over the next few days.
In strongly uptrending markets, we primarily focus on buying leading individual stocks (mostly small to mid-cap) because they have the greatest chance of outperforming the gains of the main stock market indexes. However, when the overall broad market begins to weaken, or enters into an extended period of range-bound trading, we reduce our exposure in leading stocks when they begin failing their breakouts and running out of momentum. Thereafter, we have several choices: 1.) Sit primarily in cash 2.) Begin initiating short positions in the weakest stocks 3.) Seek to trade ETFs with a low correlation to the direction of the overall stock market.
Although the iShares U.S. Home Construction ETF ($ITB) has shown a ton of relative weakness to the broad market over the past few months, it managed to put in a bullish reversal candle on very heavy volume Thursday, after gapping down below a pivotal support level around $21.20. If the bullish reversal holds up tomorrow, then we could see a weak bounce to the upside over the next few weeks, which may provide a decent shorting opportunity down the road. Note that the 10-week MA has crossed below the 40-week MA, which is a bearish trend reversal signal.
Although current market conditions are bullish, it doesn’t hurt to do a little scouting on the short side so that we are prepared if/when our timing model shifts back into sell mode. After topping out with the broad market in May, iShares Dow Jones US Real Estate ($IYR) has shown significant relative weakness to the S&P 500 over the past few months. In our analysis below, we cover the inverted ETF ProShares UltraShort Real Estate ($SRS), which is close to signaling a reversal of trend on the weekly chart.
Our existing long position in United States Oil Fund ($USO) continues to act well as it is forming a bullish consolidation pattern after a three week rally from the last breakout at $35. The consolidation has held above the downtrend line and the rising 10-week MA, which is exactly what we want to see on the weekly chart.
Our style of trading relies heavily on identifying the intermediate-term trend. In order to trade with the trend (when the market is in an uptrend), we have an automatic trend qualifier in place for all our daily scans, where we demand the price action be above certain moving averages. For example, unless the market is coming out of a major decline, all stocks and ETFs we scan will be trading above the 50-day MA, with the 50-day MA above the 200-day MA. The 50-day MA must be trending higher for a few months and the 200-day MA must be at the very least starting to turn up. By doing this, we force ourselves to scan for names that are in trend mode along with the market, and we avoid the temptation of bottom fishing.
Presently, $YINN is not actionable. However, it’s a good one to put one your radar screen. As for entry, we ideally would like to see the formation of a bullish reversal candle coincide with a pullback that undercuts support. If that happens, it would provide us with a low-risk buy entry point above the high of the reversal candle. But for now, we will just have to wait and see how the price action develops.
Since $USO has failed to clear $38.50 on two attempts, but has also held support around $36.50 on both pullbacks, if yesterday’s reversal holds, then we can assume that $USO is range-bound. We’d like to see the price action tighten up over the next two weeks while in between the trendlines on the daily chart. We will continue to monitor $USO for a low risk entry point to add to our existing position.