Going into today, we are “officially” stalking ProShares UltraShort Real Estate Index ETF (NYSEARCA:SRS), an inversely correlated “short ETF,” for potential swing trade buy entry. As you may recall, we already traded this ETF earlier in this month, as we bought its early November trend reversal, then sold into strength for a nice profit, near its mid-November high. Thereafter, we said we would continue monitoring SRS for a low-risk re-entry point on a pullback. As annotated on the daily chart below, we plan to buy SRS if it moves back above yesterday’s (November 26) high:
Notice that yesterday’s low in SRS corresponded with support of its multi-month uptrend line from the September low, which is also converging with key intermediate-term support of the 50-day moving average. Additionally, SRS “undercut” a major level of horizontal price support, which is bullish because it absorbs overhead supply by shaking out the “weak hands.”
If SRS moves back above the November 26 high, it will be back above key horizontal price support, which would also put it back above support of its 20-day exponential moving average. Even better is that we now have a low-risk entry point with a protective stop price that can be clearly defined due to the obvious levels of support below. Since we’re viewing SRS as a short-term, momentum-based swing trade, our initial price target is equal to just a 2 to 1 reward to risk ratio (our minimum requirement for all new swing trading setups). Of course, if SRS triggers for buy entry and starts to move higher, but suddenly reverses back down due to further strength in the broad market, we would still seek to exit and lock in any gains or simply break even on the trade. Regular subscribers to The Wagner Daily, our nightly ETF and stock pick service, should note our preset, exact trigger, stop, and target prices for the SRS setup on the ETF Trading Watchlist section of today’s newsletter above (click here for more details).
In addition to $SRS being added to today’s watchlist as an “official” trade setup, we have also added ProShares UltraShort Basic Materials ETF (NYSEARCA:SMN). Similar to SRS, we bought the breakout and subsequently sold $SMN into strength earlier this month for a 9.2% gain on the trade. Since then, we have been patiently waiting for a low-risk re-entry point. It’s now a similar setup to SRS, with our trigger price for buy entry above the two-day high (which puts it back above the 20-day EMA as well). Subscribers should again note our exact entry and exit prices on the watchlist section. As always, remember it is crucial to wait for an ETF or stock to actually trade through our exact, preset trigger prices before buying because “jumping the gun” with technical swing trade setups is dangerous to your financial health. If neither SRS nor SMN trigger for buy entry within the next day or two, there is no harm done, and it will simply be a sign of continuing improvement in the broad market’s health.
In yesterday’s technical commentary, we said that the bullish price action of November 23 caused our rule-based market timing system to generate a new “buy” signal. However, we were quick to point out that we still need to see new leadership developing among individual stocks, as well as a lack of “distribution days” (higher volume selling) over the next five days. Furthermore, we illustrated that the tech-heavy Nasdaq 100 Index (and $QQQ) is now approaching major overhead resistance levels that may be difficult to overcome without first having a significant “shakeout” to the downside.
Overall, this means we have a market that is trying to form a significant bottom, but still needs to prove itself before we would aggressively enter new positions on the long side of the market. As such, it is still okay to selectively look for new short positions as the market rallies into resistance, while simultaneously keeping an eye out for strong ETFs that have low-risk patterns for short-term buy entry. As written in 5 Modes Of Our Market Timing System, under the buy mode, we “may still have 1-2 short positions in the portfolio if the buy signal is weak and the prior decline was significant.”
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