Today, the major indexes are fighting to stay near their all-time-highs. Tech is trying to mount a comeback, and energy companies look to be the market’s unlikely savior in these not-so-certain times.
And every one of these endeavors has something in common:
They’re all led by large cap stocks, which despite their best efforts, continue to limp along under significant overhead pressure.
On the other side of the spectrum, however, things look far less encouraging. Small cap companies are starting to buckle under the weight of some market-wide stress, as investors return to blue-chips for safety.
Because of that, a few intriguing options have opened up to opportunistic traders – especially those of us that believe the market’s ready for a sell-off before the next leg up.
Whenever a correction occurs, it’s usually small cap stocks that initially get hurt the most. Subsequently, these are also the companies that typically rise above the rest during a recovery.
But since the market looks ready to topple, I thought it would be worth examining one of my favorite ETFs – one that soars whenever pessimism rears its ugly head:
In the daily candlestick chart above, we’ve plotted the Direxion Small Cap Bear 3x ETF (NYSE: TZA), which tracks the (inverse) movement of a selection of small cap stocks.
Basically, if small cap stocks go down, the TZA goes up.
It’s a simple tool, but it can be used to great effect when traders start to lose faith in their “pet project” investments.
And in this case, we’ve got a great setup forming on the charts that checks three separate boxes – all of which simply must be there if I’m going long.
First, the stochastics are below 40. They’re not “buried” like I would prefer, but a stochastic reading below 40 indicates that if anything, this ETF is nowhere near overbought. That means that TZA could still be oversold, and the current rise lends credence to that argument.
Next, we’ve got contact with the lower Bollinger Band (BB). Two trading sessions ago, TZA bounced off the lower BB and looks like it’s ready to rebound after setting a higher low.
Finally, and most importantly, the current daily candlestick is above the last three closes. This suggests that TZA’s price action will continue upwards should it “escape” the 5-candlestick high of $9.54 by 0.50%, where we would set our trade trigger at $9.60.
Going long here, even if the S&P and Dow don’t drop, could still be very profitable if small caps get hammered in the process. It happened last time the market stagnated, and it’s bound to happen again.
In fact, by buying TZA, that’s precisely what we’re counting on.