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Scouting the Next Bounce for Shortable Opportunities

|Includes: GLD, HYG, IWM, JNK, KRE, iShares TIPS Bond ETF (TIP), TLT, UGL, UWM, VXX
Technical

The recent multi-day slide in the stock market has set the stage for some decent shorting opportunities. As we've highlighted in recent posts, major market averages such as the S&P 500 and Nasdaq have been looking tired, and now are finally giving us the first real signs of distribution. While we must leave the door open for the possibility that the market could squeeze out of this malaise, I view the higher likelihood being some follow-through to the downside once the market alleviates its current oversold tensions.

Some of the candidates I am looking at for short-side exposure are: UWM (the UltraLong Russell 2000 ETF), HYG or JNK (Junk bond ETF), KRE (Regional Bank ETF), and TLT (20-yr Treasury ETF).

At the same time, I am looking at the following long positions: VXX (Volatility Index ETF), GLD or UGL (Long and UltraLong Gold ETFs), and TIP (Inflation-protected treasury ETF).
 
Charts
 
Taking a look at some of the ideas more specifically:
 
 
 
The small-caps have been leading the upside all year, and now are showing the most clear-cut signs of distribution. Relative strength massively divergent as the indices "double-tapped" their highs, and then the downside volume surge on the breakdown. One way to play a short on this index would be to short the UltraLong ETF (NYSEARCA:UWM), as the time-decay characteristic of these leveraged ETFs should make this trade profitable even if the movement is sideways and not straight down. A move back to 59-60 in the IWM (parent ETF) might make a good entry zone, with a safety stop at the October highs.
 
 
Another interesting idea would be to short one of the junk bond ETFs, such as HYG or JNK. Given the macro environment, it seems unusual that credit spreads would be reflecting a normal default environment. Technically, the ETF is showing signs of divergence in both relative strength and in terms of volume. Again, clear risk/reward parameters here with a safety stop at the recent highs.
 
 
While the financials have helped lead the rally from the March lows, the "black sheep" of the family, the KRE (Regional Bank ETF) has barely rallied. As one can see from the chart above, the ETF has scrawled out a triangle pattern that it is currently failing from on big volume. Weak attempts to break through the top of its multi-month range have been marked by non-existant follow-through. Pretty clear risk/reward as long as KRE stays below 22.


On the long/short side, TIP (the inflation-protection treasury ETF) should do well irrespective of whether we face a resurgence of deflation- or inflationary fears, and technically looks very solid. On the flip side, the TLT (20+ year treasury ETF) looks horrible and might be worth a short with a clear stop at 96.
 
 
Disclaimer: author's clients hold positions in TIPGLDUGL, and KRE.