Here are a few bearish/short ETF’s for those looking for either a pure-play short on the U.S. equity markets as well as for those who might be looking to hedge a portfolio of longs, particularly in an IRA where shorting of individual stocks is prohibited. I am not a fan of the 2x & especially the 3x leveraged ETFs (SPXS, SQQQ, TZA, etc..) due the decay suffered when holding these instruments for more than a day or so. The first three ETFs below (SH, PSQ & RWM) are the 1x inverse (short) tracking ETFs for the S&P 500, Nasdaq 100, & Russell 2000 Indexes. Unlike those passively managed index tracking ETFs, HDGE is an actively managed bearish ETF which shorts the stocks of companies that they deem bearish from a fundamental perspective (click here for more information on HDGE).
Since my call for a 5% correction in the markets last Friday, my updates have been focused on the intraday charts, specifically the 120-minute charts. However, it is always crucial to keep an eye on all time frames of any stock, sector or index that you are trading. Below are the updated daily charts of the $SPX (S&P 500), $NDX (Nasdaq 100) and $RUT (Russell 2000). Currently, prices on all of these major US indices sit right on or just below key uptrend line support, which is also the bottom of large bearish rising wedge patterns. The are the same wedge patterns that have been drawn on these charts for weeks or months now although I did modify the downside price targets on each index today.
The point here is that should the markets reach my 5% correction target based on the intraday charts, that would trigger a much more significant sell signal on the larger (daily) time frames, likely leading to a much larger correction in the US equity markets. One possibility would be for the SPY to go on to hit one of both of my near-term targets (T1 & T2 at 177.50ish & 175ish on the SPY 120 minute charts), which would clearly bring prices below the daily rising wedge pattern, then a bounce to backtest the wedge from below before moving sharply lower towards my first price target on the daily time frame. That’s just one of many possibilities but the important thing here is that all major US stock indices are currently testing the bottom of large bearish rising wedge patterns with significant bearish divergences in place. Live versions of these charts are available from the Live Chart Links page.
Today’s sell-off in US equities resulted in some solid technical breakdowns in some of the more volatile indices and sectors, such as the $RUT (Small Caps) and XLK (Technology) while the broadly diversified large cap indexes, such as the S&P 500 and Nasdaq 100 are still perched comfortably above their respective primary uptrend lines, albeit looking increasing vulnerable to a significant correction at this time. The S&P 400 Mid Cap Index, which falls between the more volatile, lower quality small caps and the more (relatively) stable large caps are very close to, but have not yet broken below its primary uptrend line/bearish rising wedge pattern. This pattern of the recent under performance of lower quality small cap stocks following the pronounced outperformance by small caps in the 2nd & 3rd quarter of this year is typical of the market action often observed in the final stages of an advance. (Discussed in detail in this post a couple of months ag0).
2013 has been a year plagued with false sell signals and bear traps and with all but the shortest-term trend indicators remaining on buy signal for now, today’s breakdown in the small caps and tech sector may very well prove to be just another false alarm. However, a preponderance of bearish developments such as extreme sentiment readings, record high margin interest, multi-year low short interest, multi-month bearish divergences and wedge patterns on just about every major index continues to build and will almost certainly manifest in the form of lower stock prices in the coming months. The chart below is a screenshot of four trend indicators for the S&P 500. My guess is that by the time the S&P 500 & Nasdaq 100 finally do fall below the primary uptrend lines shown on the charts above (and that can & most likely will happen much faster than most expect, as prices tend to fall much faster than they rise), that the short-term indicators will all be on solid sell signals with the intermediate-term trend very close to moving to a sell signal as well.
One final chart worth mentioning is the $NAAD (Nasdaq Advance-Decline Index), which finally triggered a sell signal today on a break below this very long uptrend line and large rising wedge pattern. As the chart illustrates, a sell signal is given following a break below the $NAAD uptrend line once negative divergence has been put in place (the MACD making a lower high while the $NAAD makes a higher high). Nothing is 100% and I believe that I’ve posted one false sell signal using the $NAAD earlier this year but that was in the early stages of a trendline break on a questionable trendline draw (very few touches), nor was I using the negative divergence as confirmation to the signal. Maybe this sell signal pans out, maybe not but this is an extremely well defined and long standing uptrend line with solid divergences in place. One possibility would be for the $NAAD to make one more thrust higher to backtest the wedge from below before a solid trend reversal in the $COMP takes hold. However, this is only the 5th confirmed sell signal in at least the last 4 years and the previous four signals were all followed by corrections that were roughly commensurate in scope and duration to the preceding advance in the $NAAD so both bulls and bears alike may want to keep an eye on this indicator.
The $RUT (Russell 2000 Small Cap Index), XLK (Technology Sector ETF) and XRT (Retail Index ETF) are just a few U.S. indices and sectors currently at key technical support levels. Any significant downside from current levels would trigger sell signals and likely bring prices down towards the first support or target levels on these charts. Links to these charts are available from the Live Chart Links page, which can be found under the Market Analysis tab on the menu bar at the top of the page.
The updated daily charts, along with annotations commenting on today’s price action are below. These charts are also accessible via the new Live Chart Links page. Most of the Active Short Trade ideas were covered in the two videos posted earlier today. I had intended on posting video updates of the the Long Trade Ideas today but should have those out by noon (EST) tomorrow.
click on any of the links below to view the live charts of each index or stock discussed.
Small cap stocks continue to underperform and will likely do so as the $SPX:$RUT ratio appears to be in the very early stages of a mean reversion. The recent wedge overshoot on the Russell 2000 Index ($RUT) has also been confirmed by prices moving back inside the rising wedge pattern yesterday with additional downside follow-thru today. Wedge overshoots often appear in the final stages of a bearish rising wedge pattern when strong momentum temporarily carries prices above the wedge pattern, only to see prices fall back inside the wedge and continue lower to break down below the pattern. Of all the diversified US indices, the $RUT will probably fall the most over the next few weeks should a broad market sell-off take place.
I have two variations of bearish rising wedge patterns drawn on my S&P 500 daily chart. On the more liberal pattern (solid white lines), prices have recently found resistance on the upper wedge line while on the alternative wedge pattern (dashed yellow lines), the $SPX is still just atop the wedge after recently overshooting it. As such, the top of the yellow wedge is now support and any move back inside the wedge will likely be the catalyst for additional downside in the broad market.
The Nasdaq 100 Index also has two alternative rising wedge patterns and as with the $SPX & basically all other US Indices, negative divergences continue to persist below those patterns, a warning sign that the odds for a correction continue to remain elevated at this time.
Apple (AAPL) is trading lower today following rare consecutive inside days. All of yesterday’s price action in the world’s largest company was contained within the range of the previous day’s’ price range which itself was contained within the previous day’s bearish engulfing candlestick. Back to back inside days are uncommon and when found at the end of a large uptrend (AAPL was up nearly 40% off it’s June 28th lows when Tuesday’s large bearish engulfing candlestick marked a 2013 high in the stock) , as part of 3 consecutive days of bearish price action, increases the odds that at least a near to intermediate-term top may be in place for the largest component of both the S&P 500 & Nasdaq 100. As of now, prices are flirting with the uptrend line generated off of the Sept 17th lows. A solid break and close below that level will further add to the bearish case for AAPL.
The Herbalife (HLF) Active Short Trade continues to move sharply lower today following yesterday’s break down below the primary uptrend line, which confirmed the entry but still looks to offer an objective short entry at current levels based on the distance to both T1 & T2.
This is an updated version of the $SPX:$RUT (Ratio of performance between the S&P 500 Large Cap Index and the Russell 2000 Small Cap Index) that was posted earlier this month. In that previous chart, I noted how spikes to or above the 0.63 ratio (red arrows) have historically preceded sharp sell-offs in the broad market. I’ve added some additional notes and trendlines to this updated $SPX:$RUT chart noting how the ratio seems to move up in a series of minor uptrend lines (dashed) above major (solid) uptrend lines and that a breakdown of the ratio below either will typically give an early sell signal for the broad market. With the small cap stocks starting to underperform the broad market in the most recent trading sessions, I am watching for a solid move back below the 0.63 ratio as well as a break below the current minor uptrend line, both of which could come as soon as today.
The following short trades will be moved to the Completed Trades category. While none of these trades reached their final price target, many of these trades did hit one or more profits targets before bouncing & exceeded their previously suggested (or any reasonable) stop level(s). As the charts on some of these trades still remain longer-term bearish, feel free contact me if you are following any of these trades & I will be glad to post or email and updated chart with comments. There are a few Active Short Trades under review that may be removed soon as well but the remainder of Active Short Trades still look very constructive at this time.
ACT- stopped out as per suggested criteria
ALK- T1 (first target) hit for a 13%, 1 -day gain then bounced.
AMZN- T1 (bottom of channel) hit the stock has continued to move higher since.
AVP- T1 hit for a 15.6% shortly after entry. From there, the stock bounced, as expected and has twice since hit the T1 support level again & still remains profitable but will be removed to make room for more attractive trade ideas.
AXP- Although the divergences persist, AXP exceeded the previously suggested stop criteria & will be removed from the Active Trades, possibly added back soon.
CPA- Prices fell about 3/4ths of the way to the first target before reversing and moving back above the uptrend line.
CRM- Prices also fell about 3/4ths of the way to the first target before the stock reversed and moved back above the uptrend line.
NTRI- Exceeded the previously suggested stop shortly after the trade was added.
PM- Hit T1 for a 10% gain, made the expected bounce off that level & has since floundered around. This trade is still profitable & has remained below entry & will likely continue down towards T2 over time but will be removed to make room for more objective trade ideas.
QQQ/QID- Although a suggested stop was not listed, the Q’s and the broad market continue to grind higher. As such, this trade will be considered stopped out and revisited once we get some solid evidence of a trend reversal in the broad markets.
ROST- Hit T3 for a 22% gain, bounced from there and has since moved back above entry & will be moved to the Completed Trades category along with these other trades.
IWM/TWM- Same notes as the QQQ/QID trade above.
SAVE- Dropped about 1/2 to the first target following the wedge breakdown and has moved considerably higher since.
SHW- Closed above the uptrend line (previously suggested stop criteria) on Friday.
SNI- Fell about 90% of the way to the first profit target before reversing an moving well past the entry price, triggered any reasonable stops.
TJX- Fell about 1/2 way to the first target before reversing & exceeding the previously suggested stop level.
TSCO- Exceeded all previously suggest stop criteria.
XLP- Hit T1, bounced, came back to test that support level once more and is now above the entry price & will be removed as the risk/reward is no longer clearly skewed to the short side.
The first series of charts below are some of the major US stock indices, including annotations. Basically, most US indices, other than the Dow Jones Industrials, continue to make higher highs while nearly all key momentum indicators and price oscillators continue to print lower highs (i.e.- negative divergences). Such multi-month divergences were also formed leading up to correction in the 4th quarter of 2012. Divergences of such magnitude don’t always play out for a significant correction but more often than not, they do. This has been