Fortunately, we now at least know which side of the market will offer the highest chance of profitable trades in the near to intermediate-term.

In hindsight, we could have immediately entered a few new short positions as soon as the S&P, Dow, or Nasdaq broke below the lows of their trading ranges yesterday. However, given the stock market's recent history of intraday "fakeouts" that have not followed through in the anticipated direction, we opted for the safer route of waiting for actual closing prices below the key support levels. Clearly, we now have those convincing closing prices that correspond to key breaks of technical support. Given this knowledge, our new plan is to enter new short positions as soon as the broad market begins to bounce. All bets on the long side of the equities market are now off. Even the healthcare ETFs, the last hope of persistent relative strength, broke down yesterday. However, rather than initiating short sales in old-school ETFs such as S&P 500 SPDR (SPY) or Dow Jones DIAMONDS (DIA), we will be buying the inversely correlated ProShares UltraShort ETFs instead. The main benefit of this approach is the ability to take bearish positions in a non-marginable, cash account, such as an IRA. Furthermore, the "UltraShort ETFs," as compared with just the "Short ETFs," enable traders to reap larger potential profits with less deployment of buying power. This is because the UltraShort ETFs move at an inverse 2 to 1 ratio of the underlying index, thereby giving traders more "bang for the buck."

In yesterday morning's commentary, we suggested that, due to its recent relative weakness, the basic materials sector would become one of the hardest-hit industries if the broad market lost support. That's exactly what happened, as the S&P Basic Materials SPDR (XLB) tumbled 3.6%. The inversely correlated and leveraged UltraShort Basic Materials ProShares (SMN) rocketed above its prior high from early August, scoring an impressive gain of 8.3%! We intentionally held off on "officially" buying the SMN breakout for the cautious reason mentioned in the preceding paragraph. However, now that the major indices have broken support with conviction, we'll be looking for a buy entry into SMN on a pullback to near the area of its breakout level. That is around the $40 to $40.50 area, or near the 20-period exponential moving average (EMA) on the hourly chart. We've annotated the potential "buy zone" area on the short-term hourly chart of SMN below. Remember that the 20-period EMA on the hourly timeframe is often a great indicator for short-term support on pullbacks:

Waiting for the major indices to bounce into new resistance of the prior lows, or at least the 20-period EMAs on the hourly charts, presents us with a much more positive reward/risk ratio than blatantly chasing new short positions in the midst of a high-momentum downward move. In our next issue, we'll take an updated look at the chart patterns of the major indices, in order to determine the most ideal ETF short entry points for the S&P 500, Nasdaq Composite, and/or Dow Jones Industrial Average. A likely scenario is that we'll more broad-based downward pressure in today's session, followed by a bounce attempt early next week. We'll have you prepared when/if that happens. If, by chance, the major indices bounce into resistance as early as today, we'll inform regular Wagner Daily subscribers of any new ETF trade entries via real-time Intraday Trade Alert.

Open ETF positions:

Long - FXE (quick bounce play, entered near yesterday's low, due to major support of Dec. 2007 low)
Short - (none)