After a week-long shakeout below the prior swing low of October 31, iPath MSCI India Index (NYSEARCA:INP) reversed sharply off the lows and back above its 50-day moving average. We initially mentioned $INP as a potential buy setup a few weeks ago, which showed the ETF had recently broken out above a 2-year downtrend line on its weekly chart. After the initial thrust up, $INP formed an 11-week base, and is now back trading back above its 50-day MA, attempting to form a “higher low.” As such, we are looking to build a position in $INP if it can hold support of the 20-day exponential moving average and push higher. Our exact, preset trigger, stop, and target prices for this ETF swing trade setup are provided to regular subscribers in the ETF Watchlist section of today’s report. The technical trade setup is explained on the daily chart below:
Per yesterday’s commentary, and as mentioned several times in recent weeks, funds continue to flow into international ETFs while domestic averages chop around. We managed to make a bit of money on recent swing trades in $FXI (China) and $EPOL (Poland), and are now waiting for low-risk entry points to develop for new entries into select international ETFs (such as $INP). Many of the international ETFs that have broken out have done so without presenting a low-risk entry point. The iShares Thailand Index (NYSEARCA:THD) is an example of this:
Note the downtrend line breakout, followed by a strong thrust to new highs. There isn’t much of a pause on the move from $75 to $81. One could argue for an entry on the breakout above the downtrend line, but with no significant higher low in place prior to the downtrend line break, such an entry would have been more of a gamble.
Instead, we prefer to wait for “higher lows” to form, which brings symmetry to the setup. For example, if an ETF or stock pulls back for 30 days and finally breaks above a short-term downtrend line, then the right side of the pattern should produce some sort of consolidation that is at least 10 to 15 days in length before breaking out. The left side of the pattern should not be 40 days in length if, for example, the right side is 10.
In yesterday’s commentary, we said the Nasdaq’s four-week bounce off its mid-November lows may be nearing an end. Although yesterday’s higher volume advance in the broad market was positive, nothing has changed on a technical level because the main stock market indexes still remain near the middle of their choppy, sideways ranges that have been in place for the past several weeks.
If anything, yesterday’s rally merely confirmed the current “neutral” mode of our market timing system, as this mode is most frequently used when stocks are exhibiting substantial day-to-day volatility, but without clear follow-through in either direction. Obviously, anything is possible in the stock market, so a sudden upside breakout above major resistance levels is certainly possible. But remember we are NOT in the business of predicting what the market will do. Rather, we merely observe what is happening at any given moment, and then objectively base our trading decisions on what we see, not what we think!