As we have been saying the past few days, our focus is now on finding ETFs that are breaking down, then looking for short selling entry points on a substantial bounce into resistance. In yesterday's ETF newsletter commentary, we pointed out PowerShares QQQ Trust ($QQQ), which tracks the Nasdaq 100 Index, as one such ETF we are stalking for potential short entry on a bounce. Additionally, we are targeting specific industry sector ETFs that are breaking down as well. One such ETF on our radar screen for potential short entry in the coming days is iShares Nasdaq Biotechnology ($IBB). The annotated daily chart is shown below:



As little as a month ago, IBB was actually a leading ETF that had been showing relative strength to the broad market throughout all of 2012. However, when market conditions rapidly deteriorate, former leading ETFs and stocks often correct to a greater degree than the broad market. In the case of IBB, the recent correction off its highs has been ugly, and we believe the ETF will correct substantially lower in the near to intermediate-term. For short selling, a downside target that "undercuts" the rising 200-day moving average is realistic, as the longer-term weekly chart shows substantial support from the prior base of consolidation just below the $128 area.

As thoroughly explained in yesterday's ETF trading commentary, accurate timing for entry points is even important on the short side of the market. Again, rather than selling short the initial move lower (very risky), we prefer to wait for the first substantial bounce that follows a key breakdown below an obvious level of support. With IBB, we are looking for a bounce that tests new resistance of the 50-day moving average (the teal line). The 20-day exponential moving average is now sloping sharply lower as well, and should soon form a bearish crossover below the 50-day moving average. This would provide additional resistance.

If IBB provides us with the bounce are looking for, we will then look to sell short on the first bearish reversal bar or opening gap down that follows. Given that the broad market may technically be due for a bounce in the coming days, we anticipate IBB to bounce as well. As always, paid subscribers will receive our exact entry, stop, and target prices for this trade setup on our "official" watchlist if/when IBB provides us with an ideal short selling entry point. The same goes for QQQ (or the inversely correlated flavors as well).

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and MorpheusTrading.com, a trader education firm.