To Score on the Pullback, Follow These Four ETFs
By Quint Tatro Oct 07, 2009 8:50 am
Traders can follow major averages by tracking underlying exchange traded funds.
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While the end of last week put a damper on the phenomenal run the markets have experienced year to date, the current question still remains: Will a slight pause turn into another bull run, defying yet another round of critics, or are the road markers loudly and clearly proclaiming to market participants that a retracement is a foregone conclusion?
I'm sure you know that I've erred on the cautious side, keeping my powder dry due to the challenging environment we've seen where moves higher don't come from bullish setups, but come from bearish patterns failing and eating shorts for breakfast, lunch, and dinner.
While the move has been sharp and rapid, at some point, I do believe we'll see a significant pullback that one can capitalize on handsomely, so in order to prepare for this occurrence, a trader should closely follow the major averages, which is easily done by tracking their underlying exchange traded funds (ETFs.)
Before diving into the charts, allow me to briefly explain what I see transpiring and then provide some history from the 1929 crash. For some time now, the market has been throwing us a curve ball with both bonds and stocks rising in tandem. As most traders know, these two arenas are seen as opposite ends of the same pole, and rarely do they synch in the same direction. Twenty-year bonds (using TLT as the tracking vehicle) are breaking out to highs not seen since May of this year. The question is, how can bonds be so bullish and stocks remain strong while they fight for the same capital pool? Only the past few days has TLT seen some weakness, which might support the thesis of bonds going down when equities rise. However, regardless of the short-term blip here, I suspect the issue is getting ready to resolve itself fully in short order.
Next, pull up oil via United States Oil (USO) and draw an ascending trendline through the March lows until today. No matter how or where you draw this line, a trendbreak has occurred, which is the signal to watch for lower prices ahead. Just the past few days, we're starting to kiss this trendline from underneath, and the cue can be taken from how it handles this resistance. One wouldn't expect equities to move higher assuming a global recession is coming to an end, while oil breaks down, however what we've seen here of late could have simply been the final flushing out of longs, before a snap back and breakout takes place. In my opinion, USO is one to watch and watch closely.
Lastly, while it is easier to see on the actual futures chart, for those who don't have the access to this, the thinly traded copper ETF, JJC, is a way to track the key commodity that's starting to roll over the past few weeks. When the markets bottomed in March 2009, copper was already coming off its lows in December 2008, a full three months ahead of the major averages. Copper was a leading commodity indicator through this entire run, and its possible breakdown, while other key commodities continue to act well, should give traders a reason to pause.
As bull breakdowns have been vigorously bought each and every time off of the March lows, I'm follow the upside trend until it's no longer there.
Let's turn to the task at hand and read some charts. All attached charts are weekly reads.
No positions in stocks mentioned.
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