Have you ever wanted to short the market because you knew it was going down but your were too overwhelmed, nervous or even scared because you were unsure of how to do it. Well, Inverse ETFs may be your thing. They have been around for more than a year but are starting to gain some popularity as volume has been increasing in recent months.

SFO Magazine has an article this month titled:
The New Kid on the Block: Day Trading with ETFs
by: Ken Tower

In the article, Ken has a section titled Inverse ETFs—A Dream Come True and goes on to speak briefly about them:

Traders have long had the ability to sell short stocks or buy put options in order to profit during market declines, but the recently introduced inverse ETFs make the process much easier and, for me, represent a dream come true.

Short selling is a messy business that never caught on with most traders. One has to open a margin account, make sure the stock is available to borrow and worry about it being called back unexpectedly. ETFs can be sold short (and are exempt from the uptick rule), but the idea of selling high and buying low remains unpopular.

The new crop of short ETFs solves this problem. They are specifically designed to move in the opposite direction of the underlying market index. Thus, if the Dow Jones Industrial Average declines by 1 percent, its inverse ETF (the Short Dow 30 ProShares Fund, symbol DOG) will rise by 1 percent. When the S&P 500 falls by 1 percent, the Short S&P 500 ProShares Fund (SH) will rise by 1 percent. That’s right, the inverse ETF goes up in price. See Figures 1 and 2. This is excellent because it’s exactly with what traders are familiar—stocks that go up. By reviewing both the long ETF and the short ETF of the same market average, one may gain additional insight into the market direction.

“Take a look at the DIA, SPY, QQQQ or IWM (Russell 2000 ETF). If those don’t look attractive, their inverse funds (DOG, SH, PSQ and RWM) are likely to impress.” - Ken Tower

Read more »

The young superstar, EDU, was up 12.56% Monday on volume 368% larger than average as it closed at a new all-time high. Below are the links to the extended coverage I have given EDU over the past ten months.

Yes, I did sell a portion of my shares early but the stock has become a trending superstar. The weekly chart is a perfect example of making higher highs and higher lows without violating any major trend lines.

The institutional holdings and the potential of their products and services is what truly caught my interest. The institutional holdings are still looking solid but not as good as they looked back in February. And yes, the bull in the Chinese market helped!

EDU, New Oriental Education, Added on 2/6/07 at $36.93, +104%

• 2/6/07: Learning about New Oriental Education (EDU)
• 2/7/07: EDU Breakout on Huge Volume!
• 2/21/07: Intercontinental Education – The 20% Rule?
• 3/23/07: Top 10 Stocks to Watch: Trend Buys

Here are some of the comments I made during my initial coverage:

Not a lot of data exists for the young Chinese stock so I wanted to take the time to focus on institutional holdings and the amount of shares that have been accumulated so far (the first reporting period). As you can see below, the majority of new institutional investors loaded up over the past couple of months and I suspect that it all started in November when volume surged and the price accelerated from $26 to $33.

I like when I see $227 million worth of shares purchased and 93 new institutional holders versus only $770 thousand worth of shares sold. This shows me major support and interest by the so called “smart-money”. The company sounds interesting and looks to have an excellent market (a description is below).

Held by Institutions: 13.10%
Money Market: 45 (42 new positions)
Mutual Fund: 51 (50 new positions)
Other: 1 (1 new position)

Shares Bought last Period: 6,313,271
Shares Sold last Period: 22,600
Value of Shares Bought: $227,073,203
Value of Shares Sold: $770,637

Current Institutional Holdings:
Held by Institutions: 174
Money Market: 91 (25 new positions)
Mutual Fund: 78 (23 new positions)
Other: 5 (2 new positions)

Shares Held: 23.480 mil
Shares Held Previous Period: 19.552 mil

Shares Bought: 7.12 mil
Shares Sold: 3.19 mil
Value of Shares Bought: $447.5 mil
Value of Shares Sold: $200.7 mil

About New Oriental
New Oriental is the largest provider of private educational services in China based on the number of program offerings, total student enrollments and geographic presence. New Oriental offers a wide range of educational programs, services and products consisting primarily of English and other foreign language training, test preparation courses for major admissions and assessment tests in the United States, the PRC and Commonwealth countries, primary and secondary school education, development and distribution of educational content, software and other technology, and online education. New Oriental’s ADSs, each of which represents four common shares, currently trade on the New York Stock Exchange under the symbol ”EDU.”

The title of the post is borrowed from the book “How to make Money Selling Stocks Short” by William J. O’Neil. It’s an ideal book for investors that focus on trading longer term trends and don’t necessarily do this for a profession (i.e.: day traders).

The book contains some excellent strategies for finding prime shorting candidates or stocks that are about to enter a declining stage that may offer excellent risk/reward setups for buying put options.

(CLICK FOR LARGER IMAGES)

I consider several of the techniques in the book to be reverse CANSLIM? Study the charts from the past that have setup ideal shorts and then screen for those same characteristics in stocks trading today. Many of the ideal shorts from past market declines have held the reverse characteristics of an ideal CANSLIM stock (that you would want to buy).

Many traders believe that the most obvious area to place a short would be near the peak of stock’s trading range but studies have found this to be untrue.

Characteristics of Longer Term Trend Shorts

• Most ideal longer term “trend” shorts take four to twelve months after the peak price to setup on the weekly chart with the majority of these shorts triggering between six to nine months.
• Look for stocks that had prior up-trends and support levels that can now act as downward resistance or entry areas.
• Once a stock tops and starts to consolidate, you want it to slice through the 50-d moving average and then the 200-d moving average.
• A crossover between the 50-d m.a. and the 200-d m.a. is ideal and is graphically presented on each chart in this post
• The odds of success increase with each failed attempt for the stock price to recover these major long term moving averages.
• Head and shoulder tops can also serve as ideal setups for potential shorts if they take at least five months to develop.
• A decreasing relative strength line and a negative pattern on the point and figure chart can also confirm that the stock is rolling over and setting up an ideal short.
• Finally, volume should be increasing and the stock should be under distribution as it violates the major moving averages and starts to break former support levels.

Read more »

The markets flashed a heavy distribution day Thursday as the NASDAQ was down 1.4% on volume 60% larger than the previous day. This was the largest showing of volume in two months and is not healthy because it was pure distribution. It was only the second distribution day over the past month so we can’t call this a bear run but please be on the lookout for a possible correction of 5%-10%. Technology stocks led the decline as BIDU gave back 10% of its amazing run.

The DOW was also down half of one percent as volume swelled 30% from the previous day.

The NASDAQ has run up more than 18% since I pinpointed the percentage of S&P 500 stocks above their 50-d moving averages crossed below the 20% oversold level. The secondary indicator was the final chart of study on August 16 as the indicator was hanging below the key 20% line as noted on this chart below (on August 16, 2007):

Ironically, this was the exact bottom as the NASDAQ has been on a rampage ever since, moving from a low of 2,386.69 to a high of 2,834.00.

The number of stocks above their 50-day moving averages crossed above the overbought level of 80 last week and we saw our first major sell-off distribution day yesterday. This doesn’t mean you must rush today to sell all of your holdings but do understand that the next sell-off is not far from happening. Study the chart below and follow the purple line to see where and when the market had peaks and valleys as related to the number of stocks on the S&P 500 above or below their respective 50-day moving averages.

This is only a secondary indicator but one of the most reliable while trying to look for clues to a short term market top and/or bottom. I have come to realize that the bottom signals have been more accurate than the topping signals over the past several years!

Don’t jump off a trend until it ends. I know, the cliché gets old but it always works!
Seriously, why would we want to fight the trend. If IPOs are working in 2007, join the party.

Some of you may ask: Isn’t it too late to join the party? Did I miss the boat?

All I can say is this:
Find an opportunity, setup the risk/reward and make the trade. Sell if it stops you out and hold on if it starts to take off. Understand what you want to accomplish with each position and know precisely how you will take profits on pullbacks, climax runs, etc…

With rules in place, your overall portfolio shouldn’t get hurt. Yoy may lose a few trades but your bottom line will only decrease by a few percent and you will know the answers to the questions above (the trend may be over). Don’t guess when a trend is over, allow the market to show you when it is over!

Strong IPOs trending Higher:

• VMW – 107.04, the stock completed the $60-$100 run and is now above the triple digit threshold. I am looking for a base at or slightly above $100 for a new entry (to add shares). If it doesn’t base, I will ride my original position.
• ATV – 23.28, an interesting stock that was up 23% on volume 158% larger than the daily average. The Point and Figure chart shows a triple top breakout buy signal on a move above $24
• WX – 40.24, An excellent run over the past two months doubling investor’s money. I am looking for a short term base to form before attempting to grab shares. The pullback area for the next buy would be near $35.
• EDU – 68.00, the stock is up almost 100% on the blog and is a personal holding. I did sell a portion of my position too early over the summer. They teach English to students and adults in China (talk about a money maker).
• FCSX – 36.71, up 7% on volume 19% above the average as the stock is starting to gain momentum above the 50-d moving average. It looks like a good time to start accumulating shares (above the 50-d m.a.)
• RVBD – 49.38, The stock is building an eleven week base with solid support near $37 (above the 200-d m.a.). Ideal entries should happen along the moving averages (50-d and 200-d) or a breakout to new all-time highs.
• JCG – 45.88, the retailer is basing along the 200-d m.a. Now is the ideal buy for longer term trend traders. It’s a prime 200-d m.a. play (excellent risk/reward right now). However, it does need to overcome the 50-d m.a. to be successful!!!
• JASO – 42.93, the stock has formed a perfect cup with handle base with a pivot point of $48.67 (according to CANSLIM). A spread triple top breakout buy exists on a move above $49.

Others that make the list but are extended:
CMG, CPLA, SNCR, GTLS, CROX, FSLR