ETF Playbook - Wednesday: February 29, 2012

The market is laborious at present, with stocks trading higher in very weak fashion as the market internals continue to deteriorate. Short-term, the risk is high of a garden variety rotational correction of -5% to -8%. At this point, the intermediate-term is constructive, which puts a very major high off into the future. All of which means we are more aggressive of a correction.

The “canries in the coal mine” related to a much needed short-term correction:

1. DJ Transports (IYT) have shown both absolute and relative weakness recently; this is due in large part to the rise in crude oil prices. But yesterday rallied.

2. Retail (RTH) formed a bearish key reversal to the downside last Thursday.

POTENTIAL LONG TRADES —

√ Gold ETF (GLD) — trendline and the 70-dma/140-dma cross were violated to the upside, which puts the trend higher. We are long Gold Shares (GDX) as the relative GDX/GLD ratio has broken out in GDX’s favor. But will consider adding a partial metal position.

√ Japan ETF (EWJ) — the 400-dema breakout is bullish; and if it can hold and trade in a sideways consolidation back to this level, then we are very interested buyers. If not, then we are interested buyers on a deeper correction in tandem with our models.

√ Latin America ETF (ILF) — the nascent 320-dma breakout is bullish; although prices are into previous low overhead resistance, with our models in a bearish configuration. We look to be buyers of weakness.

√ Brazil ETF (EWZ) — the nascent 380-dma breakout is bullish; although prices are into previous low overhead resistance, with our models in a bearish configuration. We look to be buyers of weakness into the 100- dma at $61.50.

POTENTIAL SHORT TRADES —

√ Russell 2000 (IWM:TWM) — A top building process is developing; we expect to be short sometime next week...perhaps tomorrow after the LTRO results.

√ Dow Transports (IYT) — Prices have broken down out of a bearish wedge; downside support is the 200-dema.

√ Retail (RTH) — the key reversal lower suggests a high has been put in; however, the shares can be hard to borrow for shorting purposes.

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