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Since it was such an uneventful day, we’ll keep today’s ETF and broad market commentary concise. Not surprisingly, no new valid ETF trade setups were created, and our general near-term trading plan remains the same as was explained in detail in yesterday’s analysis of PowerShares QQQ Trust ($QQQ). To recap, we continue building an internal watchlist of weak ETFs to sell short when they eventually bounce into formidable price resistance levels, then provide us with a trigger point for entry by forming a bearish reversal candle. So far, both $QQQ and $IBB are on that list, the latter of which we will discuss and analyze in tomorrow’s newsletter.

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Now that the major indices are in a confirmed downtrend, and a bounce may be on the horizon, this is a good time to revisit the charts of QQQ. If the ETF starts to move higher in the coming week, knowing the price area where it may subsequently stall will enable us to be prepared to take advantage of a potential short sale into the broad-based index ETF.

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Thanks to our market timing system remaining in “sell” mode (since October 12), we continue to be positioned primarily on the short side of the market (including being long “short ETFs”). Over the past two days, those bearish positions have started working out nicely. We bought ProShares UltraShort Basic Materials ETF ($SMN) on Nov. 7 and ProShares UltraShort Real Estate ETF ($SRS) on Nov. 5, two inversely correlated ETFs that move in the opposite direction of their underlying indexes, as bullish trend reversalplays. Yesterday, SMN gained 2.8% and SRS rallied 1.9%, as both ETFs broke out above key horizontal price resistance levels.

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Despite yesterday’s sharp losses in the broad market, the model ETF trading portfolio of our newsletter had a great day. We are currently holding four open ETF positions, three of which we were already holding going into yesterday, while the fourth ETF triggered for buy entry on yesterday’s open. Because we have been focused on both ETFs with a low correlation to the direction of the stock market (commodity and fixed-income ETFs), as well as inversely correlated “short ETFs,” all four of our open ETF positions moved higher and in our favor yesterday. Direxion 20 Year Treasury Bull 3x ($TMF) was our biggest gainer, as the ETF convincingly gapped above its 50-day moving average and printed a 5.4% gain. ProShares UltraShort Real Estate ETF ($SRS) gained 1.0% and Global X Silver Miners ($SIL) rose 0.8%. The ProShares UltraShort Basic Materials ETF ($SMN), which was first pointed out for potential trade entry in our November 5 commentary and subsequently triggered for buy entry on yesterday’s open, cruised 4.0% higher on the day. However, because our buy trigger for entry was above the November 5 high, well above the November 6 close, the ETF closed near the price level where we bought it. Nevertheless, it is now technically poised for further gains because it broke out above resistance of its five-month downtrend line.

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Going into today, we’re stalking a new potential ETF buy entry in Market Vectors Coal ETF ($KOL). After being in downtrend from April 2011 until September 2012, KOL is now setting up as a short-term, momentum-based bullish trend reversal play. On the daily chart below, notice that the 20 day moving averages recently crossed above the 50 day moving average, which is a bullish signal, although the 200-day moving average (orange line above the current price) has not yet started sloping higher. Nevertheless, there is a clearly defined area of horizontal price support and daily chart, and the ETF is also formed a pattern that is similar to an inverse head and shoulders. The head and shoulders chart pattern is bearish when it forms near the highs after an extended rally, and usually leads to new near-term lows. Conversely, an inverse head and shoulders is bullish when it forms around the near-term lows of a protracted downtrend, and will frequently lead to new “swing highs.” On the chart below, we have annotated the components of the inverse head and shoulders pattern. Finally, notice that a breakout above the three-day high in KOL will also correspond to a breakout above a substantial area of horizontal price resistance, as well as the neckline of the inverse head and shoulders pattern. As such, we are adding KOL to our ETF watchlist as an “official” trade setup today.

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Although stocks managed to retain a small portion of their November 1 gains, the technical situation created by last Friday’s decline puts the stock market in a rather precarious position. Specifically, each of the major indices formed a bearish engulfing candlestick pattern, which forms when an index or stock opens above the previous day’s high, but sells off to close all the way below the previous day’s low.

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On the surface, yesterday’s large percentage gains of the main stock market indexes may seem encouraging, or even impressive, to the casual observer. However, it is important to keep yesterday’s bounce in perspective with the degree of the overall decline in the latter half of September and throughout the month of October. For example, PowerShares QQQ Trust ($QQQ), a popular ETF proxy for the Nasdaq 100 Index, fell 7.8% from its September high down to its October low (based on closing prices). Therefore, yesterday’s 1.7% rally in QQQ means the Nasdaq 100 is still sitting within the bottom 25% of its peak to trough range over the past six weeks. Put another way,yesterday’s stock market advance was technically nothing more than an overdue bounce off the lows. This, of course, does not mean yesterday’s rally could not go on to be the start of an eventual upside trend reversal, but one mere day of price action, no matter how bullish or bearish, does not make a new trend.

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Although the spot gold and silver commodity ETFs continued trading below their 50-day moving averages after a recent pullback from their highs, it is interesting to note that clear relative strength is being observed in the actual gold and silver mining ETFs. Yesterday, for example, Global X Silver Miners ($SIL) jumped 3.2% higher. Similar action was observed in gold mining ETFs, such as Market Vectors Gold Trust ($GDX), which cruised 3.1% higher. We have been long SIL in our model ETF trading portfolio since October 22, and the ETF is now breaking out above a tight, multi-week base of consolidation.

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