Look For A Potential Swing Trade Buy Entry In The Short Financials ETF (SKF, FAZ, IWM, RWM)

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November 28, 2012 11:12am NYSE:FAZ NYSE:SKF

Although our market timing system generated a new “buy” signal at the close of trading on November 23, we have said over the past several days that the new buy signal needed to be confirmed in order to have validity of a significant bottom being formed. For that to happen, we said there

needed to be the emergence of fresh leadership among select individual stocks, as well as a lack of higher volume selling (“distribution days”) this week. But there remains a lack of impressive breakouts among leading stocks, as well as the occurrence of yesterday’s (November 27) higher volume selling. Furthermore, as recently pointed out, several of the main stock market indexes have just run into major technical levels of overhead price resistance (such as their 200-day moving averages). As such, it is fair to say our newbuy signal remains unconfirmed, and the broad market is presently giving overall mixed technical signals.

Going into today, we are targeting the inversely correlated ProShares UltraShort Basic Financials ETF (NYSEARCA:SKF) for potential swing trade buy entry. Like $SRS and $SMN, $SKF was the third inversely correlated ETF we recently profited from by buying the early November breakout above resistance, then subsequently selling into strength near the mid-November highs. Now, the technical chart pattern of $SKF is now presenting us with a potential low-risk pullback buy entry:


Similar to the other two inversely correlated ETFs mentioned above, $SKF “undercut” horizontal price support two days ago, but quickly snapped back above that level of support in yesterday’s session. Notice how the ETF is now trading back above its 50-day moving average, as well as its horizontal price support. Furthermore, volume of $SKF in yesterday’s session was approximately double its 50-day average level. This tells us there was institutional buying interest, which could aid in sending the ETF back up to test its prior highs over the next one to two weeks (accordingly, the underlying financial sector is poised to move lower). Subscribing members of The Wagner Daily should note our exact trigger, stop, and target prices for this setup on the ETF Watchlist section of the newsletter above.

In this November 26 post on our trading blog, we pointed out the significant overhead resistance in the small-cap iShares Russell 2000 Index ETF (NYSEARCA:IWM). Following up to that, $IWM formed a bearish shooting star candlestick yesterday, after failing to break out above resistance of its multi-month downtrend line from the September 2012 high. Since this occurred after $IWM probed above (“overcut”) its 200-day moving average and horizontal price resistance, it is considered to be a “shakeout,” and the short selling entry point is not overly obvious. As such, this swing trade setup now provides us with a low-risk entry point for a new short sale on $IWM. The technical chart pattern for the setup is illustrated on the daily chart below:

$IWM bounces into resistance

To benefit our subscribers with non-marginable cash accounts (such as IRA accounts), we are “officially” stalking the inversely correlated ProShares Short Russell 2000 ETF (NYSEARCA:RWM) for potential buy entry, rather than actually selling short $IWM. But if you have a marginable account and are willing and able to initiate short sales, you may prefer to just sell short $IWM, rather than buying $RWM, if the swing trade setup triggers for entry (subscribers may just use our signals for RWM to determine when to enter and exit $IWM). On the other hand, some traders may even prefer to buy ProShares UltraShort Russell 2000 ETF (NYSEARCA:TWM), a double leveraged version of $RWM. However, we generally prefer to avoid leveraged ETFs whenever possible because they frequently have a tendency to slightly underperform their respective underlying indexes as the holding period increases.

Related: Direxion Daily Financial Bear 3X Shares (NYSEARCA:FAZ)

To receive the best short-term ETF and stock picks, as well as access to our winning market timing system, subscribe to The Wagner Daily swing trading newsletter at http://www.morpheustrading.com.
To learn how to trade stocks from home with a profitable stock trading system that works, check out our popular online trading course by clicking here.

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