The intraday price action of last Friday caused the main stock market indexes to form bullish hammer candlestick patterns. When this pattern occurs after a protracted downtrend, it frequently leads to at least a very near-term reversal of price momentum. However, in order for the pattern to be confirmed, prices should first gap above their previous day's highs. If that occurs in today's session, odds technically favor an upward bias over the next several days (or more). Below, we have annotated the bullish hammer candlestick pattern on the daily chart of PowerShares QQQ trust ($QQQ), a popular ETF proxy for the Nasdaq 100 Index:



We closed the last of our open "short ETF" positions into broad market weakness on November 15, and subsequently closed our remaining two individual stock short positions the following morning, locking in substantial gains on both trades. After carefully exiting all remaining bearish positions near the lows of the current move down, right before the Friday afternoon reversal, we are now 100% flat and happy.

In the November 16 issue of The Wagner Daily, we diverted from the usual format of ETF trade analysis to provide you with a valuable, educational article on trading psychology. Specifically, we explained the importance of knowing when to be in SOH mode (sitting on hands). Although that day's commentary was lengthier than usual, it was an opportune time to remind you that cash is indeed a valid position for traders, especially when at or nearing pivotal periods in the stock market.

Based on the bullish hammer patterns that many stocks formed last Friday, the broad market may finally see a decent bounce off the lows. But rather than attempting to trade a quick, counter-trend bounce on the long side of the market, we prefer to patiently wait in cash for stocks to bounce into significant resistance levels that will enable us to re-enter the short side of the market at low-risk entry points. Again, our rationale for waiting in cash when the market bounces was thoroughly explained in our most recent commentary. Here's a recap: Just as we only use counter-trend pullbacks in uptrending markets as buying opportunities, we only use counter-trend bounces in downtrending markets as short selling opportunities.

Nevertheless, some of our subscribers who actively trade the markets on a very short-term basis may not have a problem with buying ETFs or stocks they may only be able to hold for a a few days (or possibly less). If this is you, iShares Xinhua China 25 Index ($FXI) is an ETF to consider buying, as it is one of the few non-inverse ETFs currently setting up for a relatively low-risk buy entry. The daily chart pattern is shown of FXI is shown below:



We initially pointed out the relative strength of FXI on November 14. In that day's ETF trading commentary, we said, "Although the main stock market indexes of the USA have been in a downtrend since mid-September, FXI actually started trending higher right as the domestic markets started selling off...and is now in pullback mode." At that time, FXI had just pulled back to major support of its 200-day moving average. One day later, it "undercut" both its 200-day MA and horizontal price support, then followed up with a bullish hammer that immediately took the price back above that break of support on November 16. As such, very short-term traders only might consider buying FXI if it moves above the November 16 high of $35.88. If FXI is bought, keeping a tight protective stop is crucial for controlling risk because the main stock market indexes clearly remain in a confirmed downtrend. To reiterate, this setup is NOT on our "official" ETF Trade Watchlist because it goes against the trend following rule based on our preferred time interval of swing trading.

Assuming stocks manage at least a few days of upside follow-through from last Friday's bullish reversal patterns, new short selling opportunities should start developing, as well as potential re-entry points on recent winning swing trades we recently closed. An example of this would be if ProShares UltraShort Basic Materials ($SMN) or ProShares UltraShort Real Estate ($SRS) pulled back to new support of its 20-day exponential moving average. We also continue monitoring both iShares Nasdaq Biotech Index ($IBB) and QQQ for proper trade setups and signals to sell short. In the meantime, enjoy the fact that we locked in a solid round of profits as the market has plunged lower over the past several weeks, which now gives us the mental luxury to calmly sit in a full 100% cash position while waiting for the market to bounce. Patience to wait for proper trade setups (avoiding overtrading) is one of the most common qualities among consistently successful stock traders.

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.