Profiting From ETF Trading As The Stock Market Plunges Lower

On our October 10 blog post, we explained how to increase your swing trading profits while also decreasing risk. Specifically, we discussed the power of trading a combination of both ETFs and individual stocks, the balance of which should be determined by market conditions and overall trend. Since our market timing system recently switched from “neutral” to “sell” mode, we are now focused primarily on swing trading ETFs with a low correlation to the direction of the overall stock market (such as currency, commodity, fixed income, and international ETFs). Additionally, we are selectively seeking short sale entries in individual stocks with relative weakness.

Presently, we have three open ETF positions in our model ETF trading portfolio, each of which is each showing an unrealized gain since our entry point. US Natural Gas Fund (UNG) is currently showing a 4.2% gain since our October 9 entry, FirstTrust Natural Gas Index (FCG) is still up 2.2%, and our partial position of iShares Colombia Index (GXG) is trading 2.6% above our entry price. Since these ETFs held up nicely as the market sold off sharply over the past week, we anticipate further gains and will soon be raising our protective stops to lock in gains along the way.

Now, there is CurrencyShares Euro Trust (FXE) on our radar screen for potential buy entry, which was analyzed in this October 19 post. Keep this on your radar screen as a potential ETF trade entry if you’re looking for a low-risk way to profit from current market conditions, but can not or prefer not to sell short stocks.

In this October 15 post from our trading blog, we provided you with brief technical analysis on the state of the PowerShares QQQ Trust (QQQ), an ETF which tracks the performance of the Nasdaq 100 Index. In that post, we said we were waiting for the Nasdaq 100 to bounce into resistance of its 50-day moving average, which could result in a low-risk short selling entry point that could subsequently lead to new “swing lows.” That’s exactly what happened over the past week, as the Nasdaq bounced, stalled as it approached its 50-day MA, then finished the week at new lows.

At the time of our QQQ analysis, we were already sitting on an unrealized gain in the inversely correlated PowerShares QQQ Trust Short ($PSQ), an ETF we bought when QQQ broke below the neckline of its “head and shoulders” pattern on the daily chart. As per the plan we discussed, we kept a tight protective stop on the trade, which enabled us to lock in a small gain as soon as the Nasdaq bounced the following day. When QQQ bounced into its 50-day MA a few days later, we were provided with a potential re-entry point on the short side. But rather than selling short QQQ, or re-buying the inversely correlated PowerShares Trust QQQ Short ($PSQ), we made a judgment call to simply remain positioned with several ETF trades we were already holding and were still looking good due to their low correlation to the direction of the stock market.

Original post