4 reasons why RTH looks like a good short
The major indices failed to recover from last Friday’s destruction in a meaningful way, as the broad market closed marginally higher and on lighter volume. After trading in a tight and narrow sideways range throughout the entire day, the S&P 500 and Dow Jones Industrial Average both finished 0.2% higher. The Nasdaq Composite gained less than 0.1%, but the small-cap Russell 2000 bounced 0.5%. The mid-cap S&P 400 gained 0.3%. Each of the major indices closed in the middle of their narrow intraday ranges, but still near the bottom of last Friday’s ranges. This, of course, does not bode well for positive price action going into today’s session.
Although stocks closed a bit higher yesterday, the negative is that they did so on lighter volume. Total volume in the NYSE receded by 20%, while volume in the Nasdaq was 18% lower than the previous day’s level. A bounce on higher volume yesterday would have indicated that institutions were taking advantage of buying weakness after last Friday’s pummeling, but that was not the case. Instead, the sharp drop in volume merely indicated the bears took a break from their selling. Because institutions failed to provide support yesterday, it would not be surprising to see another slide in today’s session.
Many ETFs are now beginning to present themselves as good entries for new short positions. Overall, we generally prefer to short industry sector ETFs with relative weakness instead of broad-based ETFs because they are less likely to reverse if the broad market does. One sector ETF we like on the short side is
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PowerRating) (Retail HOLDR), which we shorted per the full version of yesterday’s Wagner Daily. Below is a daily chart of RTH:
We like that RTH has been in a technical downtrend since mid-November, which is always better than trying to short an ETF that is near a 52-week high. On January 20, RTH closed below its January 5 close and on higher volume, indicating a likely resumption of the downtrend. More importantly, RTH had dropped back below its 200-day moving average, which should now act as major overhead resistance. We shorted RTH yesterday when it broke the January 20 low, and the trade is currently showing a small unrealized gain. From here, we anticipate a test of the October 2005 lows, although we have our protective stop in place just above the January 20 high.
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PowerRating) (iShares Retail) and
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PowerRating) (PowerShares Retail) are two alternative ETFs to consider if your broker has trouble locating shares of RTH to borrow for short selling. Remember you can always call your broker to request a “locate” for hard-to-borrow shares of ETFs such as RTH (or change to a broker with a wider list of easy-to-borrow shares).
As for the broad market, we would consider shorting just about every broad-based ETF on a violation of its two-day low.
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PowerRating) is one of the better looking ones because it has already been trading below its 50-day MA for the past two days. SPY also looks pretty good for a quick short-side trade if it breaks its January 20 low.
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PowerRating) could be a little more tricky to short because of the close proximity of its 200-day MA just below. Although they may correct as well, both
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PowerRating) and
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PowerRating) are best avoided on the short side due to their recent relative strength and lack of overhead supply.
As discussed in yesterday’s Wagner Daily, last Friday’s bearish price action caused us to shift our overall short-term market bias to the bearish side. The fact that both the S&P and Nasdaq failed to quickly show clear signs of reversing off their 50-day moving averages is not good. Many professional traders saw last Friday’s large percentage losses combined with the huge volume spikes as a major red flag, so they are not excited about stepping in and buying just because of the moving average support. As such, it would only require a small amount of selling pressure in today’s session to cause the major indices to fall below their respective lows of the past two days. If that occurs, a bearish chain reaction of events could cause another strong wave of selling. Of course, this is just one possible scenario, but it is one that wise traders should be prepared for. Being prepared for this scenario could prevent you from getting stuck with large losses if we see a repeat of last Friday’s action.
Open ETF positions:
Long half
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PowerRating), long
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PowerRating), short
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PowerRating) (regular subscribers to The Wagner Daily receive detailed stop and target prices on open positions and detailed setup information on new ETF trade entry prices. Intraday e-mail alerts are also sent as needed.)
Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), which he launched in 2001. Wagner appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and financial conferences around the world. For a free trial to the full version of The Wagner Daily or to learn about Deron’s other services, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com