ETF Trading Opportunities: Great Time For Shorts

ETF Edge #23

Originally posted on: thepensivenugget.com

The selling pressure in markets continues to be broad based and relentless.

Shorts continue to do well, with many markets making new lows for the year.

Selling Remains Broad And Relentless

• US markets have a shortened trading week, which might be a good thing, as the market selloff continues to be broad and relentless, with almost everything continuing to fall together
• High beta, low beta, and the SPY itself continue to fall
• XLF is telling us something interesting - financials are “supposed” to do well in rising rate environments, like now, but they aren’t. The economy clearly isn’t doing well, at least from the market’s perspective 

• Energy stocks (XLE) continue to sell off, and might have made their cycle highs. Oil prices are down to ~$110, but this is still too high with macro conditions deteriorating all over the world
• XLU has made an aggressive reversal to the downside, and now looks more intent on testing support than making new all time highs

• Fixed Income ETFs continue to eye a test of their COVID lows
• LQD and HYG move closer to testing their COVID lows, while EMB has already broken briefly below its own
• TLT has fallen below critical support as US 10y yields look to keep moving higher

Trading Ideas - Performance

Trading Ideas - Commentary

• Went short IWM again as it broke below support at 181.5
• High beta small cap stocks are primed to suffer heavy losses given equities’ bearish trend, and deteriorating macro conditions 

• Re-entered short position in EMB as it broke below short term support at 90
• Trade aims to capitalize on EMB’s bearish trend, as well as deteriorating global macro conditions

• Entered a straddle on XLU at a strike of 72, expiry Sep ‘22
• Position will be profitable if XLU makes a decisive move in either direction
• Straddle is paying off as XLU has very aggressively reversed its direction

Trading Ideas

• Long:
• A straddle on XLU is an increasingly interesting prospect 
• Consolidating between critical support and all time highs, which way will it break?
• Straddles are expensive, but will allow us to profit as long as the market makes a decisive break
• With global macro conditions deteriorating, and energy prices remaining sky high, XLU will have to move in one direction or the other

• Short:
• IWM has broken out to the downside and remains vulnerable to further sell offs given how harsh deteriorating macro conditions are on small cap equities
• It is trading a fair distance away from the next major support level at 151.5. Its short and medium term trends have now realigned 

• LQD, HYG, EMB
• LQD, HYG, and EMB can still make a large move lower, with a test of COVID 2020’s lows now a real possibility

• EEM recently broke below its well established bearish channel, and is looking very weak
• EZU and FXI are also good short candidates, as their charts still look bearish
• FXI is trickier to trade now as the Chinese government has verbally intervened once to halt the selloff in Chinese stocks

Broad US equities keep falling… SPY

• SPY continues to tumble, and has broken below support at 372
• It is currently testing support at 360, where a decisive break below could see a fall to key support at 321 (late 2020’s double bottom)

Tech stocks as well… QQQ

• QQQ continues to edge lower, after failing at an attempt to rally back above 280, and is moving closer to testing a cluster of support in the 260–267 region

As US small caps break below major support… IWM

• IWM has broken below major support at 169, and looks primed to make a move down to 151.5

Financials keep falling in a rising rate environment… XLF

• XLF continues to tumble, moving closer to testing support at 28.9
• XLF is selling off even as the Fed raises rates, which is opposite to how mainstream narratives claim financials should behave

Energy stocks might have made their cycle highs… XLE

• XLE’s sharp selloff continues, as it easily broke below support in the 78–80 region
• Closest support now lies between 68.8–71
• Oil prices are also down a bit, falling to ~110 from the 120s

Industrials test major support… XLI

• Industrials have fallen to test major support at 84.7
• A break below here could see a further sell off to the 74.7 level

Utilities fall off a cliff… XLU

• XLU crashed over the last week, and is now testing major support between 63–64
• A decisive break below could see further falls to 61 and 58

Consumer staples are also testing major support… XLP

• XLP has broken below major support at 70 to test the 68 level, making new lows for the year
• A break below here could see further falls to test 63

As Consumer discretionary heads lower… XLY

• XLY has broken below the 136–139 region, and looks likely to test major support at 122.6 in the near future

Real estate stocks consolidate… XLRE

• XLRE has started to consolidate above major support at 38.25, although bearishness everywhere else makes a further sell off likely
• Support below 38.25 lies between 33–34

European equities are poised above major support… EZU

• EZU is trading slightly above key support at 35.6, and has yet to really test it
• A decisive break below could see a sell off to test its COVID 2020 low at 30

EM stocks too… EEM

• EEM is still hovering above major support at 39
• A break here could open the door to a fall to ~32

As Chinese Large Caps remain relatively strong… FXI

• FXI is consolidating below resistance at 33.8, even as equities elsewhere keep heading lower
• Major support lies at 26.2

Investment grade corporate debt bounces a little… LQD

• LQD managed a small rally over the last week, and remains caught between resistance at 110 and 2020’s COVID low at 105
• A test of 105 remains a very real possibility

High yield corporate debt tests major support… HYG

• HYG continues to test major support ~73.3
• A break below here will open up a move lower to test 2020’s COVID low at 67.5

EM sovereign bonds hover around their COVID lows… EMB

• EMB is still in the midst of testing its 2020 COVID low ~85
• Major support below that lies ~77, which dates back to 2009

As USTs bounce back to resistance… TLT

• TLT has managed a small bounce back to test resistance ~111, with 10y yields falling back into the 3.2% region
• Closest major support lies a distance away ~102