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Slowly Implementing a Short Side Strategy


Four short strategy ETF trades to play foreign markets.

Editor's note: The following is a special free edition of Minyanville's Grail ETF & Equity Investor newsletter by Ron Coby & Denny Lamson. It was sent out to subscribers on Sunday, February 21st but is still very relevant. To receive follow-ups to the trades below as well as more ETF trades take a FREE 14 day trial or click here to learn more.

The set up that we have mentioned multiple times over the last few weeks is developing so it's now time to begin implementing a Short Side Strategy. Before we go into the specific game plan, let's first address why we see this as a high probability setup. As you all know, there are absolutely NO CERTAINTIES in this business. Great investors and legendary traders deal in probabilities combined with strict risk management discipline. That's the secret of the famous hedge fund managers who charge huge fees and make billions in profits. They wait for high probability trades and then they make their play with large positions. After that high probability trade is made, they use strict disciplines and sound money management principles to control risk. This is what our objective is for you in the Grail ETF & Equity Investor. Since we believe that we are now seeing a very high probability trade, we are going to execute our first "big call" with concentrated trades in the ETF program.

The first phase of this set up is identifying a major trend change. We use the weekly chart and Grail buy or sell signal to determine that. As we showed you on the chart last weekend, the Grail has been on a weekly buy on the S&P 500 since the first week of April 2009. This is on a very early Grail sell signal and of course it will switch back to a buy on U.S. markets if we continue to rally in the coming weeks. At the moment, these new sell signals on the weekly charts across the globe mean that you should be preparing for the next big move… which is likely down. The recent sell signals simply mean that buying dips in a bull market, according to the weekly charts, has now shifted to selling rallies in the coming bear market (or bull market correction). We will be using charts as short-term as 60 minutes in order to catch early Grail signals on the inverse ETFs we will be buying. This is so we can keep the risk corridors as tight as possible for the best risk vs. reward trade set ups.

From the perspective of a market technician, we see a set up today that has preceded many of the most famous market crashes over the past 100 years. We know that the majority of investors don't see this, as evidenced by the low and plunging VIX (Volatility index). This tells us that the majority of investors are very complacent. In fact, after the market's muted response to the Fed's hiking of the discount rate, we would say the bulls are beaming with confidence in the Fed, the economy, and the stock market right now. They don't realize that the bright light at the end of the economic tunnel could be a train coming at full steam. Time will soon tell.

We have further confidence in this set up because we see that many global market ETFs look ready for some real downside pressure over the next few weeks. Italy, Spain, Germany, Austria, the UK, Brazil, China, Switzerland, Belgium, and France are all setting up for the dreaded black cross (50 dma down thru 200 dma) that we have addressed recently. Most of these countries have huge levels of debt as a percentage of their GDP, so as the massive tidal wave of global liquidity recedes as rates rise, their debt burdens should intensify. This could be act two of the global financial crisis. Governments around the globe are going to have to address the huge mountain of debt that overhangs the entire world. With China hiking rates, and a European debt crisis emerging, the stage is set for a possible repeat of the first act we witnessed in 2008…or worse.

Thursday morning, President Obama addressed a coming US crisis saying, "The deepest recession since the Great Depression has created a fiscal crisis from disturbing deficits". The President wants to impose the "pay as you go" rules for Congress. "Pay as you go" will quickly become "look out below" for an economy that requires massive spending to prevent the country from entering a depression. We could be setting up for both a global debt and equity crisis right here before our eyes.

Now, since we cannot see the future, our thesis and coming big trades could be entirely wrong. With a Fed Chairman as active in financial markets as "helicopter" Ben Bernanke has been, almost anything can happen. Also, there was so much enthusiasm generated during the big rally in 2009, the markets will have stubborn and unwilling sellers, as well as eager buyers on every dip. This is why major tops are so difficult to catch and even more difficult to ride down. They take an extended period of distribution before the bears break the back of the bulls. Even then, powerful enthusiastic rallies will take place until the knife finally goes through the heart of the bull market. We will tell you when and if that happens in 2010.

Finally, at major tops, volatility picks up as emotions run hot. This creates whipsawing action back and forth where stop losses can often get hit. This is why you need to have persistence while keeping your stops in place for risk control. With that said, here is the set up and the partial strategy, fully outlined, for you to slowly build out next week.

Remember, 90% of the last 24 Mondays (or first trading days of the week) have been juiced upward by the Fed. So keep that in mind for Monday morning. Because of the fact that these initial positions are double and triple-leveraged, we will now be the functional equivalent of 50% invested. As the trend goes our way, we may eventually be more than 100% invested, but until we are profitable, we will, as the title of this piece says, SLOWLY implement our Short Side Strategy.

New Positions

Direxion Daily Emerging Markets Bear 3x (EDZ)
Action: We will be buying EDZ as it crosses $5.53
(Editor's note: EDZ purchased on the open 2/23)

Position Size: 5%
Stop Loss: $5.19

Rationale: The ETF corresponding to the MSCI Emerging Markets Index (EEM) has rallied right to the declining 50 DMA and into significant levels of resistance. EEM appears ready to head south, quite possibly as early as Monday. EDZ is a triple inverse corresponding to the MSCI Emerging Markets Index, which means it will move three times the move of that index.

ProShares UltraShort FTSE/Xinhua China 25 (FXP)
Action: We will buy FXP at the open on 2/22
(Editor's note: entered at $9.15)
Position Size: 7.5%
Stop Loss: $8.60

Rationale: After having rallied nicely since its most recent lows (sell rallies), the iShares FTSE/Xinhua China 25 ETF (FXI) is only a few days away from doing a "black cross". The FXP is a double inverse ETF which corresponds to the China 25 index. We are hoping for a breakout above $10.70 on FXP. If achieved it would signal the beginning of a more meaningful move higher.

UltraShort MSCI Brazil ProShares (BZQ)
Action: We will buy BZQ on a trade above $26
(Editor's note: BZQ bought on the open 2/23 at $26.19)
Position Size: 5%
Stop Loss: $24.55

Rationale: The iShares MSCI Brazil ETF (EWZ) has had a nice rally (time to sell rallies), and is providing us a nice entry point on BZQ. This ETF poked us in the eye last time, but it looks like a much better set up than before. EWZ has now clearly topped. The rapidly falling 55 DMA is telling us Brazil's market could fall hard.

UltraShort MSCI Japan ProShares (EWV)
Action: We will buy EWV on 2/22 using the ask as your limit price
(Editor's note: this was filled at $47.46)
Position Size: 5%
Stop Loss: $46.30

Rationale: Japan has an enormous amount of debt relative to GDP, so any global debt crisis will eventually extend to Japan. This ETF is very thinly traded, so we won't put a market order in. Instead, we'll be patient and slowly accumulate our position using limit price entries. The iShares MSCI Japan Index (EWJ) corresponds to the Japan Index which appears to be building a long-term top. If EWJ breaks below $9.65, EWV should really make a nice percentage move higher.

What appears to be taking place is that money is shifting away from foreign markets and moving towards U.S. markets as a safe haven. As the Brazil, China, Japan, and European market dominoes all collide, so too will the U.S. domino fall as well. Once we see that show up in fresh grail sell signals, we will quickly establish sizable positions in SDS, QID, TZA, DXD…all of which are inverse ETFs.

For more ETF trades subscribe to a FREE 14 day trial to Minyanville's Grail ETF & Equity Investor newsletter by Ron Coby & Denny Lamson for timely ETF setups poised for big moves as well as regular strategy and commentary. Learn more.

Don't Miss: With your free trial you'll get immediate access to Ron & Denny's follow-up piece, Filling Out More of our Short Side Strategy, which just went out this morning
to subscribers with 5 additional trades. Sign up now.
Position in EDZ, FXP, BZQ, EWV

This information is confidential and is intended only for the authorized subscriber. Please notify us if you have received this in error by telephoning 212-991-6200.

Ron Coby & Denny Lamson are the authors of the Grail ETF & Equity Investor newsletter. The Grail ETF & Equity Investor contains Messrs. Coby and Lamson's own opinions, and none of the information contained therein constitutes a recommendation by Coby, Lamson or Minyanville that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Messrs. Coby and Lamson will not advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. All information contained within the Grail ETF & Equity Investor newsletter is impersonal and not tailored to the investment needs of any specific person. Do not email Messrs. Coby or Lamson seeking personalized investment advice, which they cannot provide. Messrs. Coby and Lamson's past performance is not a guarantee of future performance and there is no guarantee that the suggested investments will have the desired results. The performance represented here is for informational purposes only, and should not be construed as an offer or solicitation of an offer to sell or buy any security. Please keep in mind that this Portfolio does not necessarily account for the different risk tolerances, investment objectives, and other criteria used by individual investors when making an investment decision. You are encouraged to conduct your own research and due diligence, and to seek the advice of a qualified securities professional before you make any investment.

Addition information on Coby Lamson can be found in its form ADV Part II located at

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