Over the past several days, we have been clearly explaining that our current plan of action is to be in "SOH mode" while waiting for the weakest ETFs and stocks to bounce into significant technical resistance levels, such as moving averages and prior lows. Then, we would wait for the bearish reversal patterns as a signal to initiate new short positions (and/or buy inversely correlated "short ETFs"). As such, we were pleased with yesterday's (lighter volume) relief rally because it puts us closer to getting back into the market with new swing trades, albeit likely on the short side.

Given yesterday's large percentage gains, the current bullish momentum could easily cause stocks to move higher for at least another week or two before the bears return to the market, causing the established downtrend to start taking hold again. Nevertheless, it's important to remember that the stock market is very dynamic. For example, the sudden presence of an "accumulation day" (higher volume gains), followed by a confirmation day in which stocks jump another 1.5% to 2% at least three to four days later, could actually generate a new "buy" signal in our market timing model. If that happens, no problem; we don't care either way. Our proven stock trading system is based on trading either side of the market by simply reacting to current price action in front of us, rather than making predictions about market direction. Simply put, we trade what we see, not what we think!

In yesterday's newsletter, we said we were looking for pullback re-entry points into our recent winning ETF trades ($SRS, $SMN, $SKF, and $TMF). We also said we were looking for new short entry points in non-inverse ETFs such $IBB and $QQQ. Yesterday's rally was a good start, as the inverse ETFs we're stalking for re-entry pulled back substantially, while the non-inverse ETFs conversely bounced sharply higher (approaching resistance). Still, none of these ETFs we have been discussing are near the levels where we would consider entering them just yet. However, we came across one ETF that actually is already set up for possible short entry in today's session.

The SPDR S&P Homebuilders ETF ($XHB) was one of the last ETFs to break down below support during the recent decline, but now the ETF has a lot of immediate overhead supply and resistance to contend with. Just like many other stocks and ETFs, XHB jumped 2% higher yesterday. However, it formed a bearish reversal candlestick (similar to a shooting star candlestick) after running into resistance of both its 20-day exponential moving average and 50-day moving average. The ETF closed near its intraday low, and below both moving averages. This is shown on the daily chart of XHB below:



The setup for this swing trade is that we will only sell short XHB if it trades below yesterday's low. This would provide us with a valid short entry point because its current relative weakness would indicate a resumption of downward momentum if that happens. Note that entering before a break of yesterday's low is risky and not a valid short entry point. We are listing XHB as an "official" setup on our ETF Trading Watchlist today, so regular subscribers of The Wagner Daily should note our exact, preset trigger, stop, and target prices for this swing trade setup on the short side. By the way, if you are new to short selling stocks, we recommend taking a quick look at this short selling strategy video on our trading blog.

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.