Five ETF Plays for a Short-Term Reversal

Consolidating in a tight range after their large gains of Oct. 28, the main stock market indices are again trying to form at least a short-term bottom. Previous bullish reversal attempts this month have quickly failed and led to new lows, but market internals and individual chart patterns are slightly better this time around. In case the stock market actually gets some legs and follows through on this counter-trend reversal, here is a list of ETFs on my radar screen for potential short- to intermediate-term plays.

CurrencyShares Japanese Yen (FXY - commentary - Cramer's Take), which I initially pointed out on Oct. 9, has definitely been the strongest ETF of the past month (aside from the inversely correlated short ETFs).

In case you missed previous entry attempts, FXY is now pulling back to support of its 10-day moving average, after last week's breakout to a new all-time high. This will likely develop into another buy entry point. Support of the 10-day MA is marked as the dashed line on the daily chart below.

Click here for larger image.

Source: TradeStation

A pullback to the 10-day moving average (MA) often presents an ideal entry point to anticipate a resumption of the dominant trend in strongly trending stocks and ETFs. However, I'd ideally like to see FXY consolidate in a tight range for at least a few more days, allowing the 20-day MA to rise up to provide support as well. If that occurs, consider a re-entry after FXY moves above its hourly downtrend line resistance.

Traders looking for a quick momentum trade might consider buying the iShares Corporate Bond (LQD - commentary - Cramer's Take), which responded favorably to the Oct. 29 interest-rate cut. Already trading above both its 10- and 20-day moving averages, LQD is now poised to break out above the high of its short-term consolidation within the next several days. Also, notice how its volume on Oct. 29 was substantially higher than average, hinting at institutional accumulation.

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At the time of publication, Wagner had no positions in the stocks mentioned.

Deron Wagner is the founder and head trader of Morpheus Trading Group. His daily focus is managing and trading the Morpheus Capital Hedge Fund, which he founded in April of 2004. He also teaches his trading methodology with The Wagner Daily, The MTG Stalk Sheet, and The Wagner Weekly newsletters.