ETF Swing Trade Setups: Breakout, Trend Reversal, & Short Sale

In yesterday’s ETF commentary, we pointed out the developing bullish setup in SPDR Energy ETF (XLE). However, as the ETF had not yet broken out to new highs, we said it may need another week or two of consolidation, as well as tightening of the price action near its prior high.

While XLE remains on our internal watchlist as a potential buy entry in the near-term, further research enabled us to actually find a better ETFs swing trade setup within the same industry sector. Below, take a look at the daily chart of SPDR Oil & Gas Exploration and Production ETF (XOP):

The primary difference between XLE and XOP is that the former has not yet broken out above resistance of its February 2013 high, while the latter already has. This means XOP has been showing slightly more relative strength than $XLE. On the longer-term weekly chart below, notice that XOP has also just broken out above key horizontal price resistance of its prior high from September of 2012, which should further spark bullish momentum from here:

Over the next few days, XOP may form a bull flag chart pattern by drifting slightly lower from the high of this week’s breakout (as shown on the first chart above). If it does, it could lead to an ideal swing trade setup, as new support of the February 2013 breakout level is just below the current price. However, just in case the ETF immediately continues higher from here, without forming a bull flag first, we have added XOP to today’s watchlist as an “official” trade setup going into today’s session.

Since XOP is presently only 1% above its breakout level, it’s not too far extended to take a shot from here if it continues higher. However, if the ETF trades through our trigger price (above the two-day high), we will reduce risk by only entering with partial share size on this momentum trade setup. Conversely, we may be more inclined to enter with larger share size if a bull flag pattern first develops from here instead, as that would increase the odds of follow-through to the upside.

In addition to XOP, there are two other “official” ETF swing trade setups, as well as two new individual stock trade setups, going into today.

One new ETF setup is a buy entry into ProShares Short 20+ Year Treasury Bond ETF (TBF) if it rallies above last week’s high. A similar trade to buy TBT on a breakout above last week’s high was listed on our watchlist earlier this week (Monday), but it did not trigger and we removed it. Now, we have added the short ETF back to our watchlist, but are targeting the non-leveraged ETF (TBF), rather than the leveraged one (TBT), because there will be a slightly better correlation to the underlying index if TBF triggers for buy entry.

The third and final new ETF trade setup on today’s watchlist is a potential short selling entry into SPDR Metals & Mining ETF (XME). Although our market timing model is still in “buy” mode, this sector has been absolutely dead, trading near the 52-week lows while the market trades at its highs. Therefore, because of its relative weakness, even the slightest pullback in the market should cause this ETF to fall apart to new lows.

What are your thoughts on these potential ETF swing trades? Got any others you like? Please drop us a line below.

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