|
Published: June 8, 2010
Technically, there is a strong possibility
we are entering a "Stage III" topping process that would precede
a
bear market.
Given this outlook, I am looking to profit by searching for
technically weak stocks and indexes. The Rydex S&P MidCap 400
Pure Value (NYSE: RFV) is a technically weak
exchange-traded fund (ETF) that mirrors the performance of
mid-cap
stocks within the S&P.
RFV is comprised of 83 primarily U.S.-based holdings from
diverse sectors, spanning industrials (21.2%) financials (15.2%)
and consumer discretionary (15.2%).
All of these sectors have been weak. During the past month,
industrials have returned -7.1%, financials -9.6% and consumer
discretionary -3.3%.
The fund has a
net asset value (NAV) of $30.29 a share, which means it
trades below par.
As the chart shows, RFV is technically bearish and appears to be
entering a Stage III top.
|
 |
RFV hit a high of $34.90
in late April. At this
time, the fund
encountered historical
resistance going back to
late 2007.
Since its April high,
RFV has sharply fallen.
It has broken an
ascending triangle
formation as well as its
major uptrend line,
which began forming in
March 2009. A minor
downtrend line has also
formed off the April
2010 high.
RFV has now fallen
below the 10-week moving
average, which is flat
and currently intersects
near $32. The fund is
also below the 30-week
moving average, which
intersects at $29.65. In
the past two trading
weeks, the fund traded
below the 30-week moving
average, although it
didn't close there. This
past trading week (June
1st), the fund closed
below the 30-week moving
average.
Since the "Flash Crash" of May 6th, RFV has tested an
important point of support near $28.15 on several occasions.
Generally, the more times support is tested, the more likely it
is to be breached. A secondary shelf of support near $26.75
could temporarily stop the fund's fall. However, if this level
is broken, the next zone of support isn't until $22.50-$24.00.
The indicators are bearish.
MACD is on a sell signal. The MACD histogram is climbing in
negative territory.
Relative Strength Index (RSI) is in a downtrend and falling.
At 46.8, it is near the critical 50 level and is neither
oversold nor overbought.
Stochastics gave a significant sell signal in late April. It has
sharply fallen since and is approaching oversold levels.
Fundamentally, RFV is richly valued on several measures. The
ETF has a trailing
price-to-earnings ratio (P/E) of 15.0. RPV's current
return on equity (ROE) is only 2.6%.
Given RFV's poor valuation and weak fundamental outlook, I think
investors could do well to short this ETF.
-- Melvin Pasternak
Editor,
Double-Digit Trading
Co-Editor,
Trade of the Week |
