ETF Playbook: Friday, February 10, 2012

Greece is front and center again this morning in a negative light, which given the broader US market is overbought by quite a few technical measures  the risk-reward is shifting towards lower prices. But this is a process, which means we still foresee “higher highs in the days/week ahead towards the 1350-to-1370 zone before a more sizeable correction materializes. At present, we’ll view it as only a garden variety -5% to -8% correction  to perhaps 1260, for there is very little to suggest technically that the broader market is at major peak  i.e. A/D line continues to make new highs.

Of further note: the following ETF/SPY ratios are oversold on a weekly basis  implying the risk-reward is skewed towards outperformance in the months ahead: IFN; EWJ; EPP; EZU; EFA; EEM; OIH; GLD; DBC; DBA. GLD. DBC and DBA are in the commodity group, which would imply further “QE” as it were in the months ahead; or financial turmoil/bad weather. Lastly, the S&P Financials (XLF) and Broker-Dealer (IAI) ETFs broke out above resistance forming double bottoms. However, although XLF/SPY has nascently broken above weekly moving average resistance, this could potentially be a test of resistance. It is too early to determine.

POTENTIAL LONG TRADES

√ Gold ETF (GLD)  trendline and the 70-dma/140-dma cross were violated to the upside, which puts the trend higher. But the overbought condition is being worked off as prices are correcting lower. A return to, and successful hold of the cross would bring us in a buyers.

POTENTIAL SHORT TRADES

√ Euro ETF (FXE/EUO)  The rally off the lows is back into overhead resistance; this resistance should ultimately prove its merit.

√ S&P 500 (SPY:SDS) or Russell 2000 (IWM:TWM)  If today is the downside beginning of a top building process, then we must look at both of these ETFs as being our downside vehicles.

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