Broad Conviction Selling Into the Close on Tuesday Spells Market Trouble Ahead
Intermediate Forecast and Money Flow on SH - Short SPY ETF - Turn Bullish
Anyone following StockCheatSheets.com understands that institutions have been sneaking out of equities and heading for the exits for weeks now. Yesterday, the floodgates opened and selling intensified. The market is running away from a probable Fed hawkish bias thanks to persistent inflation, but conversely weakening economic data too. The worst of both worlds.
Momentum Danger Zone readings (Factor 10) imply more selling ahead today on long index and sector ETFs. In many cases, such as Oil, Financials, Silver, Mid-Cap Stocks, Large Caps, the Nasdaq 100, and Small Company stocks, the intermediate and long term market forecasts are now in some semblance of downside agreement, with indicators varying in intensity. Conversely, inverse ETFs are now showing intermediate strength. DOG, the short Dow 30 ETF, for example, is showing some degree of bullishness in all four Market Forecast time-frames (and very bullish momentum into the close)
There are entry signals for the short ETFs today, but proceed with caution. Inverse, and especially leveraged ETFs, do not trade like their un-leveraged long counterparts. Expect moves in shorter time-horizons and with more volatility.
I use the 21-day EMA and set a volatility based stop loss underneath it as my exit point. Bounces off of or up through an up-trending 21-day exponential moving average are my favorite way to trade short ETFs. Stop-losses are set 2 ATR below that moving average. That’s twice the average true trading range of the stock or ETF over a rolling 21-day period. There is an indicator called Keltner Channels that allows us to set this up on a chart.
On DOG, the red line is my exit point. The entry signal is the bounce up off a rising 21-day EMA. I stay in the trade until the red line is breached. (Some prefer tighter stop-losses than what I’m allowing, and that’s a personal preference)
Here’s a broader view of mostly double-short ETFs. As always, click to enlarge and view on a computer. Focus on bullish or very bullish buying pressure and intermediate market forecast indicators. “Very Bullish” momentum is powerful confirmation of downside move that’s likely to follow through. I stay away from thinly traded short ETFs. Liquidity is an issue when there’s a stampede out of these instruments as the result of some type of after-hours news. This is deep-end-of-the-pool trading. Risks are much higher.
We’ll check relative strength trends tomorrow. Let’s let the downside flush play out first to discover which parts of the market go down the least. This can be a tell about what a recovery will look like.