Published: November 6, 2009

After watching the stock market skyrocket more than +60% off its March 2009 lows, investors are getting anxious about a possible pullback . . . and for good reason. When the stock market gets ahead of itself, just like it did in the late 1990s and in late 2007, the resulting pullback can be swift, severe, and downright painful for investors.

It should come as no surprise then that anxiety about a potential market pullback has reached an almost frenzied pitch in recent weeks, especially in light of last year's devastating declines. And investors have every reason to be anxious right now, as a long-overdue market pullback finally appears to have started with a sharp drop of more than -4.0% by the S&P 500 last week.

My Cycle Forecast Model of the S&P 500, which is available exclusively to subscribers of my premium service, Mastering the Markets, has been forecasting a roll-over in the market for several weeks. I trust this model, as well as my Turner CrossOver Oscillator and a number of other sophisticated tools I have at my disposal. And right now all of them are telling me the market is headed lower -- perhaps a lot lower.

As a result, this week I'm recommending a special kind of security that could help you profit from a declining market. These securities are called inverse ETFs (exchange-traded funds), and they're designed to increase in value when the stock market heads lower.

I've reserved my top-ranked inverse ETF for my premium service, Mastering the Markets. However, if the overall market plummets, then the following inverse fund could also deliver substantial gains in the coming weeks...

The ProShares Short Dow 30 ETF (NYSE: DOG) is designed to deliver the exact opposite performance relative to the Dow Jones Industrial Average. So if the Dow declines -15.0%, then this fund should jump +15.0%. As you may know, the Dow Jones consists of 30 of the largest bellwether stocks in the nation. These stocks are likely to nosedive in the face of any sort of overall market correction. And if they do, then shares of DOG could rise sharply.

Below are my Technical reasons for selecting DOG for this week's trade:

• I divide each security's trading range over the last three years into four Zones. (If you look closely, you can see each of these Zones labeled in gray text in the center of the chart above.) Each Zone represents 25% of the stock's three-year total range. If an equity is in Zone 1, it is in the lowest 25% of its three-year price range. Meanwhile, Zone 4 represents the top 25%. If I can find a stock that is in Zone 1 and has the fundamentals and/or technicals to support a climb back up into Zone 4, then it becomes a candidate for consideration. In this case, DOG is trading in Zone 1 and appears poised to move sharply higher off its recent lows.



• DOG's share price has moved from the top of Zone 4 (near $90) last March to a recent low in the mid-$50's. Although DOG is technically still in a short condition (note red color of the price line in the chart above), it has begun to bottom. All of my data tools are telling me DOG is likely to head back into the mid-$60's, which would represent a jump of about +15.0% (or more) from today's levels.



• The fund's average daily trading volume has been steadily growing over the past few weeks, and it spiked sharply higher last Friday. This is a strong sign that significant momentum is building up in shares of DOG as investors look to get in.

• Buy DOG with a limit order at $56.50 (Good for the Week)


• Set an initial stop loss at $50.57


• Target price = $67.00

-- Mike Turner
Editor
Mastering the Markets, Trade of the Week