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The Direxion 30-year Treasury Bull 3X ETF ($TMF), an index that tracks the performance of long-term government T-bonds, has been in a long-term uptrend since February of 2011, but has been in an intermediate-term correction off its highs since July of 2012. Now, it appears as though TMF is setting up to break out above resistance of its 3-month downtrend line and resume the long-term uptrend that has been in place for nearly 2 years. The weekly chart below shows the long-term uptrend in TMF, while the daily chart that follows shows the potential breakout above the intermediate-term downtrend line.

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As we have been saying the past few days, our focus is now on finding ETFs that are breaking down, then looking for short selling entry points on a substantial bounce into resistance. In yesterday’s ETF analysis, we pointed out PowerShares QQQ Trust ($QQQ), which tracks the Nasdaq 100 Index, as one such ETF we are stalking for potential short entry on a bounce. Additionally, we are targeting specific industry sector ETFs that are breaking down as well. One such ETF on our radar screen for potential short entry in the coming days is iShares Nasdaq Biotechnology ($IBB).

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In yesterday’s newsletter, we took an updated look at anticipated support and resistance levels of several of the broad-based ETFs. We then concluded our technical commentary by saying,”Now that the switch to an overall bearish sentiment has been confirmed, we are now patiently waiting for an eventual bounce in the broad market that will provide us with ideal, low-risk entry points on new short positions or inversely correlated ‘short’ ETFs.” This means our focus is now primarily on the short side of the market, as even ETFs with a low correlation to the direction of the stock market have started feeling the pinch of the overly bearish sentiment in the equities markets. However, patience to wait for the proper entry points is crucial because the ETFs with relative weakness that are on our radar screen as potential short sale candidates remain glued to their lows.

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Over the past week, we have been noticing an interesting and notable divergence between the performance of U.S. broad-based ETFs and select emerging markets ETFs. The PowerShares QQQ Trust ($QQQ), which tracks the Nasdaq 100 Index, has convincingly broken down below key intermediate-term support of its 50-day moving average and is technically in bad shape. However, the iShares Emerging Market Index ($EEM) has been consolidating in a tight, sideways range during the same period, and also formed a “higher low” within its base of consolidation. With a little help from a bounce in the broad market, EEM will likely break out above the highs of its range and start making another leg higher.

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After the major indices began pulling back from their highs in late September, then subsequently bounced in the beginning of October, our disciplined, rule-based market timing system shifted from “confirmed buy” mode to “neutral” mode on October 5. This change in our market bias perfectly coincided with the peak of the bounce off the lows of late September. In “neutral” mode, we can be positioned either long or short, but position size of all new trade entries will be lighter than usual, in order to reduce risk. Also, our portfolio will be primarily (or fully) in cash, with only a few positions in either direction. As we entered into neutral mode on October 5, we exited all long positions in individual stocks and began focusing primarily on swing trading ETFs with a low correlation to the direction of the overall stock market (ie. currency, commodity, fixed income, and international ETFs). One week later, on October 12, the necessary signals were generated for a new “sell” signal (click here to review each of the five different modes of our timing model). The recent changes in our sentiment, based on our market timing system, are shown on the daily chart of the PowerShares QQQ Trust ($QQQ) below.

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Earlier this week we posted a chart of CurrencyShares Euro Trust ($FXE), showing a bullish consolidation above the 200-day moving average. The weekly chart below shows the break of a year long downtrend line on a pick up in volume. With the strong move off the lows, the price action should continue to consolidate in a tight range and ideally not retrace more than 38% of the move measured from 7/27 to 9/14. Currently the lows of the consolidation is only 33% off the highs of the move.

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While Spain and Greece were very much the focal point of Wall Street for Q1-Q2 of 2012, the price action in the iShares MSCI Spain Index (EWP) is quietly making a nice comeback. After a strong rally off the summer low which broke the weekly downtrend line, $EWP stalled out at resistance around $30.00. A breakout above $30.00 should find resistance at a weekly downtrend line around $35.00.

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After a strong run up off the summer lows, CurrencyShares Euro ($FXE) is now consolidating in a tight range above the 200-day moving average. $FXE should continue to set higher swing lows within the base, which would be a bullish sign. In terms of moving average confirmation, although we would prefer to see the 50-day MA above the 200-day MA, the 50-day MA is sloping higher over the past month. We will continue to monitor the action over the next few days for low risk entry point.

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