Given yesterday’s bullish price action, it is important to determine whether or not total volume levels confirmed the bullish price action of the reversal day. Because turnover in the NYSE was indeed 2% greater than the previous day’s level, the S&P 500 (barely) registered an “accumulation day,” which was indicative of institutional buying. However, total volume in the Nasdaq actually receded 2%, preventing the tech-heavy index from scoring the same label of a bullish “accumulation day.”
Since the buy signal is not yet confirmed, it is fine to continue focusing on selling short select ETFs and individual stocks with bearish chart patterns and relative weakness. Yesterday, our trade setup in ProShares UltraShort Real Estate Index Fund ETF ($SRS), an inversely correlated “short ETF” triggered for buy entry by rallying above the previous day’s high. Now, we are adding another inversely correlated ETF to our watchlist for potential buy entry in today’s session.
In yesterday’s newsletter, we said that the price action of November 23 caused our market timing model to generate a new “buy” signal. However, we were quick to point out that we still need to see new leadership developing an individual stocks, as well as a lack of “distribution days” (higher volume selling) over the next five days. Furthermore, we illustrated that the Nasdaq 100 (as shown with the chart of $QQQ) is now approaching major overhead resistance levels that may be difficult to overcome without first having a significant shakeout to the downside.
It was obviously positive that stocks continued building on their gains since bouncing off their mid-November lows, and did so on higher volume last Friday. However, it’s still too early to declare an end of the broad market’s multi-month downtrend from its September 2012 highs. One of the biggest reasons we say this is because the main stock market indexes still have an abundance of overhead supply to contend with. Furthermore, several of the major indices are now bumping into, or are quickly approaching, key technical resistance levels.
Today, the US stock market will close early, at 1:00 PM EST. As previously mentioned, today’s newsletter is accordingly an abbreviated version, just to update you on our positions. The EEV setup from Wednesday did not hit our trigger price for entry, and has been removed from our watchlist and replaced with two additional setups instead. Going into today’s shortened session, we are stalking iShares Nasdaq Biotechnology Index ETF ($IBB) for potential short entry and ProShares UltraShort Basic Materials ETF ($SMN) for possible buy entry. See the ETF Watchlist above for trade details. We have pointed out both of these setups as potential swing trade entries in recent days, and will provide updated chart analysis of these setups in Monday’s newsletter.
One ETF that has been “officially” added to today’s ETF Watchlist as a potential buy entry is ProShares UltraShort Emerging Markets ETF ($EEV). As you can see on the chart below, EEV broke out above a six-month downtrend last week, and has now pulled back to near-term support of its 20-day exponential moving average, which recently crossed above the 50-day moving average. This is a bullish trend reversal signal. With the ETF moving higher in yesterday’s session, but closing just below the previous day’s (November 19) low, we are now stalking EEV for potential buy entry above the two-day high. Please note our exact entry, stop, and target prices in the ETF Watchlist section of the newsletter above.
Over the past several days, we have been clearly explaining that our current plan of action is to wait for the weakest ETFs and stocks to bounce into significant technical resistance levels, such as moving averages and prior lows, and then wait for the bearish reversal patterns as a signal to initiate new short positions (and/or buy inversely correlated “short ETFs”). As such, we were pleased with yesterday’s rally because it puts us closer to getting back into the market with new swing trades (albeit likely on the short side).
We closed the last of our open “short ETF” positions into broad market weakness on November 15, and subsequently closed our remaining two individual stock short positions the following morning, locking in substantial gains on both trades. After carefully exiting all remaining bearish positions near the lows of the current move down, right before the Friday afternoon reversal, we are now 100% flat and happy.
Our market timing model remains in “sell” mode, as it has been since October 12. After shifting from “buy” mode to “neutral” mode on October 5, then shifting from “neutral” mode to “sell” mode on October 12, our objective, rule-based market timing system once again precisely did its job by getting us out of the long side of the market within a few percent of the highs, then prompting us to sell short (and buy inverse ETFs) right before the recent decline picked up substantial downward momentum. However, even though our market timing model is still in “sell” mode, we are now in a situation where the reward to risk ratio for entering new short positions at current levels is simply not very positive.
After rallying off the summer lows and clearing the 200-day MA in early-September, SPDR S&P Oil & Gas Exploration ($XOP) stalled out after one thrust above the 200-day MA. Over the past few months the price action has deteriorated, starting with the uptrend line break in late October, which coincided with a break of the 50 and 200-day MAs. The 20-day EMA is now below the 50-day MA, and the 50-day MA is beginning to slope lower. We also see a series of lower highs and lower lows the past two months, signaling a reversal of the uptrend. At its current level, $XOP is not actionable on the short side, but it is worth monitoring for an entry on a bounce to the 200-day MA.