SOME OF MY FAVORITE ETF TRADES AND WHY

First off let me say that the May 3rd ETfs featured as longs have done very well and I'm happy with the timing on those trades.

It's important to understand ETFs and that many of them have a 1-day performance period, meaning the ETF managers are trying to replicate 1 day's worth of market action, they are not trying to make their ETF track like the underlying issue over a 30 day period. I'm a firm believer in outperforming the market. Some people don't want to buy "risky assets" like leveraged ETFs, but I'd say to them that those who bought mortgage backed securities thought they were buying an extremely conservative and safe asset. The fact is, whenever you have money in the market, it is at risk. Silver longs recently saw short covering and an asset that was historically undervalued, it seemed like a pretty safe and obvious trade. They couldn't account for the margin hikes the same way buyers of MBS couldn't account for a housing market melt down and all of the fraud that was a part of that. So in my view, if your money is in the market, it is at risk no matter what you are invested in. There's even the risk of investing in something so conservative that you take an inflation related loss. The only way to make money consistently is to mitigate risk through risk management (see the link at the top right of this site for some ideas on the subject).

When investing in ETFs, especially leveraged ETFs, the risk comes from the minute differences in the ETFs performance (they try to match the underlying asset, but often are off in either direction), especially in a choppy environment using leverage. The best time to use a leveraged ETF is when it is trending (in your direction).  Right now, a number of ETFs are very close to or entering the profitable stage of investing, which is after the choppy base, stage 2 or mark up. This is when we have our best opportunity to get a decent trend.

So here are my favorite ETFs, I'll add more over the weekend, but for now, these are the faves and why.

 EDZ- an inverse ETF which is a short play on Emerging Markets. Inflation is the keyword in Emerging Markets and even some of the bigger more developed like the BRIC countries (Brazil, Russia, India and China). The Fed through Quantitative easing has been exporting inflation to these markets and their overheating. EDZ's chart shows a nice, simple rectangle base and this 30 min chart shows multiple points of accumulation at the base's lows. The white box shows 3C in a leading positive divergence which is different then the white arrows which are relative positive divergences. A leading divergence is a sign of heavy accumulation and this is what we want to see when it's taking place right before a breakout. EDZ technically is in a breakout, it may pullback a bit, but it's very close to emerging from the chop and moving toward mark up. There's a lot of potential upside here so if you haven't bought in, there's still plenty of time, this is very early in  the stage in which you want to look at these trades.

 EWV didn't take off right when the Japanese crisis started and we didn't expect it to. Why? Because this as a fundamental development that the market ha no way of discounting, thus they needed to accumulate a position and that takes a bit of time, they also want to do it at the best price levels possible. EWV looks like it's now turned the corner and ready to move toward mark up.

 FAZ has been a long time favorite, it's just been a matter of timing. The fundamental situation with the major banks is horrible for a number of reasons, not the least of which is the fact they'll be spinning off their profitable trading desks. FAZ based out in a nice triangle and 3C on this daily chart has been moving up the entire time. Again, the white box denotes a positive leading divergence as 3C makes new highs while FAZ is relatively low in price.

 FXP is a short on the China 25. China is entering an overheating stage, inflation is high, and  they're facing a massive real estate problem like we did several years ago. Wages are rising and they may start losing some of the production that has driven growth.

 OIH I featured yesterday and showed you the H&S top in place with all of the right ingredients. 3C daily has acted exactly as it should in such a top and while there may be a little volatility around the neckline/support, the bigger view is that of a decent opportunity for a move down.

 TWM is one option for shorting the Russell 2000. It seems that during QE1/2 and the POMO regime, the target of POMO fund flows was the Russell 2000 and for a pretty good reason. The R2k is considered to be one of the broadest averages with all sorts of different businesses. The Fed wanted to portray a picture of the economy getting better and the stock market has long been used as a leading indicator for the broader economy, the problem here is that the R2k was MANIPULATED higher through POMO profits, not from market participant sentiment. Thus the R2k may be the average with the most to lose once QE/POMO ends. It's very close to breaking out above it's downtrend line and if you look carefully, there's an inverse H&S bottom in place. I used Money Stream to show the positive divergences because of scaling on the 3C daily chart.

 TZA

 UNG is a shorter term long trade, there's a good positive divergence in place and a nice flat base, it's also close to a breakout.

 XLK-  Technology Thus far on the daily chart, there's an unfilled gap. There's also a double top. That unfilled gap back in February would be considered a breakaway gap. It will be very bearish if that gap remains unfilled. This would be a position you'd short or buy a similar inverse ETF.

Here's the hourly 3C chart showing a cycle of accumulation and a very negative divergence into flat trade. Divergences occur most frequently into flat trade.

While these are some of my favorite ETFs, and I will add more this weekend, I DO NOT advocate trading in ETFs alone. They are useful in diversifying your portfolio and gaining broad coverage to a weak or strong sector without trying to pick the perfect stock in that sector. However, by no means should ETFs be the bulk of your holdings. There are advantages to being short a stock/equity that you can't get in buying an inverse ETF, more on that here. 

Most of all, I like these ETFs because they are entering the stage in which they are the most useful, in a trending environment.