In a recent article, we predicted that the equity markets were in trouble and in the process of topping out. During the summer, it appeared as though the B wave within the A-B-C retracement was complete. Although the move sub-divided, it became one of three legs to make up a greater B bounce higher. Hence, we witnessed marginal gains that served to test market price highs.
Our analysis concluded this move to be a bull trap, providing insiders with one last opportunity to take profits off the table. E-wave moves can extend a bit but our bearish outlook remains valid. Fast-forward to the ever dreadful October and investors are now beginning to show signs of panic. The pullback has only just begun.
Let’s take another look at the Dow Jones Industrial Average:
Assuming lower price lows continue to materialize, 21,500 for the DOW looks to be an initial target price given the size of the A wave within the A-B-C. With a double top in place, it’s difficult to determine at this point as to whether the second peak will serve as a B or final V move from the larger ‘bullish’ degree impulse waves that began back in early 2009 when the market last bottomed out.
When viewing the index on a monthly price timeframe, the second peak is higher, and thus, would serve as Wave III’s internal third wave peak. If that’s the case, we’d still find ourselves in a bearish Wave III’s internal fourth (IV) retracement.
The bottom line is that no matter how one slices it, equity markets are likely to experience an A-B-C pullback that’s going to sting. The DOW, along with other indices like the S&P 500, should continue to fall sharply like a knife in the months ahead.
To buffer the negative effect of an equity market pullback on your portfolio, Inverse ETFs can be a highly effective tool in your investment arsenal. Investopedia’s definition of an Inverse ETF:
“An inverse ETF is an exchange-traded fund (ETF) constructed by using various derivatives for the purpose of profiting from a decline in the value of an underlying benchmark. Investing in inversion ETFs is similar to holding various short positions, or using a combination of advanced investment strategies to profit from falling prices. An inverse ETF is also known as a “Short ETF,” or “Bear ETF”.
While there are many ETFs available that are designed to profit from the decline in a sector or market, several add leverage to their objectives. Fund providers such as Direxion and ProShares are popular for their leveraged ETFs. These funds, such as the Direxion Daily S&P 500 Bear 3x Shares ETF, use derivatives to provide double and triple the daily return of a given index.”
Sample ProShares Inverse ETF tickers seen below:
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