{"id":3759,"date":"2014-02-25T05:56:36","date_gmt":"2014-02-25T10:56:36","guid":{"rendered":"http:\/\/www.morpheustrading.com\/blog\/?p=3759"},"modified":"2022-04-06T15:07:23","modified_gmt":"2022-04-06T19:07:23","slug":"sell-short-emerging-markets","status":"publish","type":"post","link":"https:\/\/morpheustrading.com\/blog\/sell-short-emerging-markets\/","title":{"rendered":"How To Profit From Submerging Emerging Markets ETFs"},"content":{"rendered":"

\"EmergingBecause my strategy is focused on trend trading the momentum of leading stocks, I generally avoid the short side of the market whenever my market timing model<\/a> is on a buy signal (as it presently is).<\/p>\n

However, this is\u00a0not<\/em>\u00a0always the case with ETFs (exchange traded funds).<\/p>\n

Since ETFs come in many flavors of asset classes, those with a low correlation to the direction of the US equity markets (commodity, currency, fixed income, etc.) sometimes present low-risk swing trade setups that are largely independent of broad market trend.<\/p>\n

That’s the nice thing about ETFs — they often provide interesting trading opportunities outside of my standard trend trading model.<\/p>\n

Emerging Markets Getting Submerged<\/h1>\n

One such ETF on my radar screen for potential short selling entry is iShares\u00a0Emerging Markets ETF ($EEM)<\/strong>, an international ETF.<\/p>\n

Last month, $EEM convincingly broke down below support of a long-term uptrend line, and is now bouncing into new resistance of that prior support line (which is also converging with resistance of its declining 50-day moving average).<\/p>\n

Yesterday (February 24), the price action stalled near the $39.70 area for the second time in two weeks.<\/p>\n

In addition to key resistance of its 50-day moving average and prior uptrend line around that price level, there is also resistance from a prior swing low that formed in mid-January (around $40).<\/p>\n

On the daily chart below, notice how perfectly the 50-day moving average (teal line) has been acting as resistance:<\/p>\n

\"$EEM<\/p>\n

Since I prefer to sell short stocks and ETFs as they are bouncing into resistance, rather than on their initial break of support, the stalling action of $EEM as it bounces into resistance of its 50-day moving average now presents me with an ideal, low-risk entry point on the short side (click here<\/a> to learn more about my short selling entry strategy).<\/p>\n

Buy It Instead<\/h1>\n

If you have an IRA or other non-marginable account that disallows short selling, you may instead consider buying Direxion Emerging Market Bear 3x ($EDZ)<\/strong>, an inversely correlated “short ETF” that is leveraged 3x to its underlying index.<\/p>\n

As the price of $EEM moves lower, $EDZ is designed to move higher (with greater volatility). Notice how the chart of $EDZ kind of looks like an upside down chart of $EEM:<\/p>\n

\"$EDZ<\/p>\n

Going into today, I am stalking $EDZ for potential swing trade entry. Subscribing members of my nightly ETF and stock trading report<\/strong><\/a> should note my exact entry, stop, and target prices for this trade setup in the “Watchlist” section of today’s newsletter.<\/p>\n

One quick note about “short ETFs” in general is that most of them have a tendency to underperform their underlying indexes as the holding period increases. Therefore, inversely correlated ETFs are best designed as short-term, momentum-based trading instruments, rather than ETFs to consider buying and holding.<\/p>\n