I spent some time this weekend looking for ‘rebound' trade setups. I had a couple I was going to write about this morning. But stock futures are down sharply. I have to change my thinking to bearish trades.
If there are large gap-downs at the open, it will add risk to shorting individual stocks. The best bet, to play perhaps several more days of weakness, is to take SMALL positions in one or more inverse ETFs and exit them as soon as the downside momentum stops (whether it be hours or days). So I will reprint the advice I've given in several newsletters over the past year, and I'll keep looking for stocks that are ignoring all the market noise, appear to be under accumulation, and may be in the strongest position to rebound.
(from my December 13, 2013 newsletter…)
“I would consider small positions in inverse market ETFs with a trade plan to exit them quickly upon a strong upside reversal in the market. My favorites in the past have been SDS (ProShares UltraShort S&P500, an ETF that seeks daily investment results that correspond to two times the inverse (-2x) of the daily performance of the S&P 500), SKF (ProShares UltraShort Financials, an ETF that seeks daily investment results, before fees and expenses, that correspond to two times the inverse (-2x) of the daily performance of the Dow Jones U.S. Financials SM Index.), and FAZ (Direxion Daily Financial Bear 3X Shares, an ETF that seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the performance of the Russell 1000Â® Financial Services Index).
Do not use inverse ETFs for medium to long term investing, only very short term trading. Also, since they use derivatives and leverage to achieve 2x or 3x performance, make sure you understand how they work and what their tax implications are.“
Another way to buy insurance is to trade the volatility index. On April 29th I covered a trade setup on VXX.
“We can buy the iPath S&P 500 VIX Short-Term Futures Exchange Traded Note, symbol VXX. If volatility as measured by the VIX jumps, this ETN will quickly jump. This is meant to be a hedge trade, a small trade to offset a sudden pullback. Consider it insurance. I would do a small position only. Also, be sure to check the tax consequences on any ETF/ETN based on a futures contract like VXX is.“
(8/31/2015 update: we made 33% on that trade – it might be a good time to re-enter a long position in VXX targeting a 10% or so rise)
My standard cautions are to consider small positions only, and quickly exit on any strong overall market reversals to the upside when news, sentiment, and the markets seem to be improving.
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, please click on the following link: www.markettamer.com/seasonal
Copyright (C) 2015 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com.
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