11 ETFs to Trade in Whipsaw Conditions

10/03/2011 7:00 am EST

Focus: ETFS

Tyler Bollhorn

Founder, Stockscores.com

To take advantage of fast swings in the current market conditions, Tyler Bollhorn of Stockscores.com likes to use 15-minute charts to time trades. He likes to avoid headline risk, preferring to focus on a group of ETFs that have proven to be good vehicles in recent weeks.

Kate Stalter: We are speaking today with Tyler Bollhorn of Stockscores.com. Tyler; give us your impressions of the current market, and what you believe that individual investors should be doing at this juncture.

Tyler Bollhorn: Well I would refer to this as a beta market. What that means is, all stocks are pretty much correlated heavily to the indexes. That makes it difficult to trade individual names.

Normally when I trade, I look for alpha, which is a stock trading on its own story away from the market correlation. There is just not a whole lot of that right now, so I have had to change my trading strategies to focus on trading beta.

What that means is, I’m looking for setups on the big index ETFs—the S&P 500, the Nasdaq-100, and of course, their derivative ETFs, whether they be the normal ones or the leveraged ETFs.

That is where I’m finding that action, and that has actually been great in the last two weeks, because there has been so much price volatility in those indexes that swing trading those moves can really yield some great profits.

Kate Stalter: Any particular indexes or ETFs that investors and traders might want to take a look at right now?

Tyler Bollhorn: Well I have probably ten or 12 that I follow every day, and that would include the Spyder Trust (SPY), and then of course, those leveraged ETFs that track those, which are the UltraShort S&P 500 (SDS) and the Ultra S&P 500 (SSO).

Those are probably my favorites, but I also trade the Silver Trust ETF (SLV) and the SPDR Gold Trust (GLD). I will sometimes trade the United States Oil Fund (USO) or the S&P GSCI Crude Oil Total Return Index (OIL), although OIL is not all that liquid, so I prefer not to trade that one.

There is the Treasury Bond Market ETF (TLT), the UltraShort 20+ Year Treasury (TBT), and then of course you get into Dow equivalents of the S&P 500. So sometimes if tech stocks are moving faster than the overall market, I might trade the PowerShares QQQ (QQQ) or again its leveraged ETF as well, the UltraShort QQQ (QID).

So those are kind of the things I have focused on. I’ve got, like I said, maybe ten or 12 on my screen, and I just look for certain pattern setups that I like, and when I see one, I will take the trade.

Kate Stalter: It sounds like these are very particular to some of the volatility that we have been seeing lately, and that these are not necessarily long-term trades. Would that be correct?

Tyler Bollhorn: Absolutely. I’m a trader, I don’t buy and hold. And certainly in this market, I wouldn’t recommend anyone buy and hold, because there is just so much volatility that I think it is very difficult to predict where the market is going with individual stocks and ETFs.

Also, you are going to get whipsawed out of positions too easily, because you can see the market go up 400 one day and down 500 the next. So it is not a market for taking your eyes off of it.

Many of my newsletter readers and my students are saying, “What should I do for the long-term stuff?” And quite truthfully, I think it is best to be in cash.

Now if you can watch the market a little bit more closely, I am swing trading for the most part. I trade off 15-minute charts. It doesn’t require that you watch the market really closely, but you need to be able to check the screen every once in a while, particularly in the first hour of trading, and that is where I find my setups. My typical hold period is two days to five days.

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Kate Stalter: What are some of the indicators that you are looking for, Tyler, when you are making a trade?

Tyler Bollhorn: I’m not a big believer in indicators. I know within technical analysis there are all kinds of indicators that people use.

I am more of a pattern person; I look for predictive chart patterns, whether they be channel breaks, ascending triangle breaks, flag breakouts, that kind of thing.

The key thing that I focus on for just about all of my trading strategies is abnormal activity. I look for statistically significant abnormal behavior. So those are things that we have programmed in Stockscores.com and that I have also programmed into TradeStation so that I can find these. But it is a proprietary indicator that I use that really focuses in on that abnormal activity.

Kate Stalter: What are some areas right now that traders should really avoid, even if they might be tempted to go into it, but it might just be a really bad idea at this time?

Tyler Bollhorn: You know there are certain stocks that have a lot of headline risk. For example, Bank of America (BAC).

It has great volatility, but I would be a little bit nervous holding that overnight simply because you never know if they are going to announce that they have another lawsuit on their hands, or what have you. That can cause a big gap that takes you through your support prices.

I always plan to take a loss if the stock falls to a certain price. If you get a gap through that, well you end up taking a much bigger loss than you had anticipated.

So some of those key names…Research In Motion (RIMM) is another one that has just too much event risk for me. You could be shorting RIMM, and then one day they announce that they are being bought and it is going to gap up 20%, and you could really get crushed on a short.

So I prefer to trade things that aren’t really going to grab the headlines, but still have good volatility, and I have had the best gains with those.

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