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Two ETFs to Short, and Two to Buy

Kevin Baker

With the Dow Jones Industrial Average swooning 226 points yesterday, what was once a resistance level on the way up -- 13,690 points -- is now acting as an important level of support. The bulls and bears have drawn the line in the sand and are fighting it out.

Either way the overall market goes, the resulting volatility this summer opens trading opportunities to either sell short or to go long.

Technically bearish ETFs have a five-day moving average share price below their 10-day moving average share price, with a moving average convergence-divergence indicator giving a fresh sell signal within the last 10 days. The convergence-divergence indicator, created by Gerald Appel, uses exponential moving averages to find turning points in the price movements of securities.

ETFs that are considered technically bullish are the complete opposite. They have a five-day moving average above their 10-day moving average and a convergence-divergence indicator giving a fresh buy signal within the last 10 days. They must also have set a new 52-week high in the last five trading days.

Here are four trading ideas. The first two are poor performers that have bucked the major upward trend of the market over the last few months but are gapped lower as the market's short-term direction turns south. Both are giving technically bearish signals.

The KBW Regional Banking ETF(KRE Quote) set a new record low on Tuesday of $42.50. Consider selling short an ETF that holds 94.5% banks and 5.5% savings and loans at a time when these sectors are being dogged by credit concerns.

The same forces are working against the PowerShares Listed Private Equity Portfolio (PSP Quote). This ETF follows the Red Rocks Listed Private Equity Index, which is made up of publicly traded private equity, investment holding and business development companies as well as venture capital funds.

The second pair of ETFs have climbed steadily over the past three months. They both gave back a little in Tuesday's selloff, but not enough to reverse their technically bullish signals.

Consider buying the Oil Service HOLDRs Trust (OIH Quote) on yesterday's dip of $4.01, or 2.13%, to $184.25. The highly volatile price of West Texas intermediate crude oil temporarily fell below $74 a barrel, allowing a good entry place to buy the fund. The Oil Service HOLDRs has been 55.8% positively correlated to the price of West Texas intermediate crude oil over the last year. And higher oil prices appear to be one of those things that can't be avoided.

The final bullish pick, the Software HOLDRs Trust (SWH Quote), set a new 52-week intraday high of $43.53 on Tuesday before slipping back a bit. The fund's largest holding, Microsoft (MSFT Quote), which represents 22% of assets, is sitting on a king's ransom of about $20.4 billion in cash and securities as of June 2007, making it immune to the credit market turmoil. Companies that can avoid the turmoil of the bond market by internally funding projects are better positioned for growth.

Remember to place your stop-loss orders to help protect you from sudden moves against your positions. Good luck.