ETF Playbook: Shifting From Defensive to Bearish

The Eurozone is front and center once again this morning; with very little news to speak of other than a “better-than-expected” manfuacturing report that showed “less contractoin” than feared. Germany’s manfacturing expanded slightly. This report took the S&P futures from a -4 point lowss to a +10 point gain.

Yesterday, we noted the S&P futures had corrected in a sideways fashion through time and not necessarily prices. With this morning’s gains, this argues for higher highs in the days ahead towards the 1350-to-1370 zone before a correction occurrs. We simply cannot ignore any longer the fact the “risk-on” QQQ/SPY, IWM/SPY and IYT/SPY ratios broke out on Monday. They had lagged, and they formed part of our thesis for a correction to the S&P 1265 level.

This morning, we’ll exit our short position in the Russell 2000 (TWM)  understanding full well will likely return to it sooner rather than later once our upside target is hit at 1350-to- 1370.

POTENTIAL LONG TRADES

√ Crude Oil (USO)  a sideways consolidation has developed, with prices trading in volatile fashion around the 200-dma. We like the energy stocks more than we do the physical.

√ Gold ETF (GLD)  trendline and the 70-dma/140-dma cross were violated to the upside, which puts the trend higher. But it is overbought; and we believe there will be a better risk adjusted entry point in the days or week ahead..

POTENTIAL SHORT TRADES

√ S&P Financials (XLF)  a bearish key reversal to the downside occurred; if it extends lower  then we could consider short positions with model support.

√ Broker-Dealers (IAI)  Wednesday’s rally turned lower from previous high resistance; and extended lower yesterday. We find this bearish.

√ Euro ETF (FXE/EUO)  The rally off the lows is back into overhead resistance; this morning’s weakness suggests a new leg lower has begun.

To read the entire report please click on the pdf file below.