Buying Opportunities After Panic Selling

by on May 22, 2011 | Updated May 24, 2011 | ETFs Mentioned:

Weekly Recap

Last week proved to be quite bumpy for investors, as asset classes from stocks to commodities–and everything in between–swayed between gains and losses for the last several trading days on Wall Street. Volatility was  abundant across all markets and domestic equity indexes ended the week relatively flat, much like crude oil and silver futures. Gold, on the other hand, manged to stage a comeback and assert its appeal as a safe-haven asset class, ending the week higher and closing at $1,513 an ounce. Despite the weak performance of equities for much of the week, the U.S. dollar failed to gain ground versus major currencies, perhaps suggesting that this weeks losses were merely a sign of profit-taking versus a more meaningful shift in fundamentals.

Weekly Outlook

The coming week features a number of key earnings reports, bank meetings, and political events that should give markets direction as May winds to a close. From new home sales in the U.S. to election results in Spain and central bank meetings in Mexico City, below we profile ETFs that are likely to be active in trading over the next five days:

  • Global X China Industrials ETF (CHII): The CNY HSBC Purchasing Manager Index Manufacturing for May comes out late Sunday night. The previous reading was 51.8, dropping from 52.5 in May. Better than expected data will likely send CHII higher, while a surprise to the downside would put pressure on equities and commodities as a whole.
  • Market Vectors Germany Small-Cap ETF (GERJ): On Tuesday, Germany reports its GDP growth for the most recent quarter. The previous reading came in at 1.5% Q/Q. The large cap-focused MSCI Germany Index Fund (EWG) could also be active around the release of this data point, and the euro zone in general will  look to Germany’s economic strength for guidance in coming days.
  • iShares U.S. Home Construction Index (ITB): On Tuesday morning, U.S. new home sales are reported for the month of April. Analysts expect the figure to come in at 305,000, which would be an increase from the previous period. Home sales month/month are also due out and this figure is expected to come in at just 1.7%. Toll Brothers, a major component in ITB as well as XHB and PTB, also reports earnings before the bell on Wednesday.
  • Rydex CurrencyShares British Pound Sterling Trust (FXB): On Wednesday Great Britain is expected to post its GDP growth for the most recent quarter. The last reading came in at a 0.5% increase Q/Q while the year-over-year figures came in at 1.8%. The Pound has been loosing ground versus the U.S. dollar since the beginning of May, which could present a buy opportunity in FXB if a better-than-expected GDP number manages to re-ignite bullish momentum in the fund.
  • PowerShares DB USD Index Bullish Fund (UUP): The U.S. reports its Q1 GDP growth on Thursday. Analysts expect the country to grow by an annualized rate of 2.2% compared to the previous reading of 1.8%. Personal consumption is also due out, and analysts expect this metric to rise by 2.8% from the 2.7% in the previous period. Keep an eye on the U.S. dollar as it struggles to hold onto recent (and minor) gains in the currency market.
  • Industrial Select Sector SPDR (XLI): Durable goods orders are due out at 8:30am ET on Wednesday. This is seen as a leading indicator of industrial production and capital spending and represents data for the previous month. XLI is probably the most common tool used for accessing domestic industrials exposure, while its extremely liquid options market makes it very popular amongst traders.
  • Mexico Small Cap ETF (MEXS): The Central Bank of Mexico is slated to release its decision regarding interest rates on Friday. The bank kept the rate unchanged at 4.5% after it’s last meeting and will likely maintain the current “wait-and-see” approach before tightening monetary policy. Keep an eye on MEXS as this new fund may benefit from a bullish market reaction following the interest rate decision (the large cap-focused EWW should also be active this week).
  • iShares MSCI Canada Index Fund (EWC): Royal Bank of Canada  reports earnings before the bell on Friday. EWC will likely see an increase in trading volume as the Royal Bank of Canada is the funds biggest holding at just over 6% of total assets. Financials account for nearly 30% of EWC, so any insights from RBC could give direction to the entire sector.
  • iShares MSCI Spain Index Fund (EWP): Spaniards headed to the polls this weekend and riots are already underway as the ruling arty braces for a meaningful loss of influence. EWP has been sinking since the begging of May, and equities could face further pressure if a divided legislature makes it increasingly difficult for prime minister José Luis Rodriguez Zapatero to implement economic reforms.
  • Direxion Airline Shares (FLYX): The airline industry once again faces uncertainty related to natural disasters after a volcanic explosion in Iceland over the weekend. Last year, the Eyjafjallajokull volcano caused widespread cancellations and cost the airline industry hundreds of millions in lost revenues; it remains to be seen if the recent eruptions will have a widespread impact.

Technical Trading Ideas

The volatility in recent sessions has created a number of intriguing investment opportunities from a technical perspective, and below we highlight ETFs trading around technically significant levels. Our price targets coincide with the mentioned time horizons, while the support level ought to be considered when placing stop-loss orders. Most of these recommendations require active management as they are only relevant if the mentioned fund establishes support above the suggested levels . As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.

Technical Trading Idea: Short XLF

SPDR Select Sector Fund Financials
Price Target $15.45-$15
Time Frame 1-10 days
Support $16.30

Analyst Take

 

Click to Enlarge

XLF has been steadily retreating towards its 200-day moving average (yellow line) since peaking at $17.20 a share on February 18th. This decline is worrisome because the fund has managed to set lower highs and lower lows over the past two months, while domestic equity indexes like the S&P 500 have been far more resilient despite their recent weakness as well. XLF will likely continue lower towards its 200-day moving average before establishing viable support. Looking at the Fibonacci Retracement, which captures the funds most recent run-up higher, we get likely projections of possible levels that XLF may retrace to. The fund has already broken support at the 50% level once before, which gives weight to the possibility of further declines towards the 61.8% and 78.6% levels. However, if XLF holds support above its 200-day moving average next week, then the current downtrend needs to be re-assessed as the fund might be due for a bounce higher.

Technical Trading Idea: Short IEF

iShares Barclays 7-10 Year Treasury Bond Fund
Price Target $94.45
Time Frame 1-5 days
Support $96

Analyst Take

 

Click to Enlarge

IEF is in a very strong long-term uptrend, gaining over 2% in the last month alone. The fund is currently trading right around its 200-day moving average (yellow line) and it has made several attempts over the last few trading days to establish support above it. IEF could be due for a quick correction given the fund’s recent failed attempts to establish support above the psychologically significant 200-day moving average. By drawing a Fibonacci Retracement which captures the funds most recent run-up higher, we get likely projections of possible levels that the fund may retrace to. The first level of support comes in at the 38.2% level, while a break below that could sink IEF lower to $94 a share. However, keep in mind that the trend is your friend and currently IEF is in a definitive uptrend. If the fund manages to establish support above $96 a share in the coming days it’s best to wait on the sidelines before jumping in either long/short depending on your horizon and risk tolerance.

Technical Trading Idea: Long JJC

iPath DJ-UBS Copper Total Return ETN
Price Target $60
Time Frame 1 month
Support $52

Analyst Take

 

Click to Enlarge

JJC has been in a stellar uptrend since bottoming out at the start of 2009 and over the past year has returned around 35%–outperforming the S&P 500 by an impressive margin of ten percentage points. However, since peaking at $61.69 a share on February 14th, 2011, JJC has declined by more than 10%. The fund is currently trading right above its 200-day moving average and it makes for a very appealing buy opportunity given its remarkable long-term strength. If JJC establishes definitive support above $54 a share in the coming days then the fund will likely continue higher and attempt to break above the next levels of resistance at $56 and $58 a share. However, it is possible that JJC may encounter profit-taking at the $56 level, while a daily close below $52 a share could easily send this fund even lower towards support at the $50 mark. The current uptrend needs to be re-assessed if JJC sinks below $50 a share in the coming weeks.

Disclosure: No positions at time of writing.