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.