How to Profit if the Wheels Come Off…
I have been warning readers of my premium Mastering the Markets service for the past few weeks that mid-September looks to get ugly unless you plan on being short the market — which is my plan.
Below is my time-cycle forecast for the S&P 500 for the next few weeks:
This coming week looks to be a shorting opportunity. I will be selling into an expected rally that will last only until either the end of this week or early next week. Then, as you can see, if the time-cycle forecast proves to be correct, the market could begin a stair-step move from about 1120 to near 1020 — a decent opportunity to make money if the trend holds.
#-ad_banner-#I prefer to buy inverse exchange-traded funds (ETFs) in falling markets, rather than shorting individual stocks. The reason is entirely due to risk. A positive exogenous event can occur at any time with any individual company that could push it from a declining trend to a spike higher. It is the risk of these potential upward spikes that put more risk on an individual short trade than I normally like.
If the fundamentals, technicals and time-cycle forecasts are compelling, I will short individual equities, but my personal preference is to short a basket of stocks rather than a single company. In a basket of stocks, as represented by an ETF, exogenous events can still occur that will reverse a trend, but the odds are lower, in my opinion, that such an event would suddenly reverse a large group of stocks at the same time as opposed to the odds of a one-off event suddenly causing a trend reversal in a single stock.
My pick this week is ProShares Short S&P 500 (NYSE: SH). This is an inverse ETF that is designed to match the inverse of the S&P 500. This means that, in theory, SH will move up point-for-point with a corresponding move lower in the S&P 500.
Yes, this ETF is trading below my trend line (10 week moving average, time-shifted forward by three weeks), but it is still in a technical buy condition (green color in chart above). I like the fact that volume appears to be bottoming, as this could be an indication of a change in trend.
But, the biggest reason that I like SH is based on the time-cycle forecast. If the forecast holds true for the upcoming week, SH could move some lower where it becomes an even better buying opportunity if the wheels do come off the market in mid-September.
Action to Take–> Based on the analysis above, I would trade buy SH and place a limit order at $49.51. The ETF closed Friday at $50.65, so if the market does rally higher this week, the $49.51 level could be reached. I would then set an initial stop loss at $47.94, with a target price of $59.50.