The S&P 500, represented by the S&P 500 SPDRS (ARCA:SPY), dropped below a prior low (August 21) on August 27, indicating that more downside is likely forthcoming for large cap index. An inverse ETF moves in the opposite direction of its associated index, which means when an index declines the inverse ETF rises. These ETF products make it easy for traders and investors to hedge long positions, as well as speculate on falling index prices. Here are four inverse ETFs that have seen a surge higher due to stock market weakness since the start of August.

SEE: Inverse ETFs Can Lift A Falling Portfolio

ProShares Short S&P 500 (ARCA:SH) broke above the August 21 high at $28.85 on August 27, indicating a further advance. The next likely target is $30. Beyond that there is resistance right up through to $31.60. If the price manages to make it beyond that region then the overall market will be in a significant decline and the next target for this ETF is $33.80. On the other hand, if the Short S&P500 ETF drops back below $28.31, then the overall market will have stabilized and being long in this inverse ETF isn't recommended.

ProShares Short Russell2000 (ARCA:RWM) moves inverse to the Russell 2000 index. This ETF has not been as strong as the Short S&P 500 ETF, and therefore, if going long an inverse, the Short S&P500 is the preferred at this time to the Short Russell2000 ETF. This ETF can be used as a confirmation signal though. Ideally if the Short S&P500 ETF is rallying, this one should as well. Look for the Short Russell2000 ETF to break above $19.73; doing so confirms the upside move in the Short S&P 500. If the ETF can't break above $19.73 or drops back below $19.10 this is a sign the overall market has stabilized, and being long an inverse ETF thus isn't recommend. 

SEE: Portfolio Management Pays Off In A Tough Market

ProShares Short MSCI Emerging Markets (ARCA:EUM) moves inverse to the MSCI Emerging Markets Index. This inverse ETF has been stronger than both the Short Russell2000 and Short S&P 500. Over the last three months this ETF is up just over 10%, while Short S&P 500 is up 0% and Short Russell is down about 4.5%. This ETF is in an uptrend, making it the ideal choice for those seeking an inverse ETF to take advantage of overall stock market weakness. The ETF has already broken through short-term resistance signaling a continuation of the uptrend. The next point of resistance is near $31.25, but if it moves much above that it is quite likely that it will break above $32 as well. The short-term uptrend seems quite entrenched at this point, and it would take a drop below $28.25 to indicate the uptrend is in trouble. 

Direxion Financial Bear 3X Shares (ARCA:FAZ) is a leveraged ETF, which means (in this case) it moves three-times the inverse of the Russell 1000 Financial Services Index. For example if the financial index is down 1%, this ETF will be up 3%. On August 27 the ETF jumped 6.58%, eclipsing the former swing high and signaling a further advance. There is a bit of room to run as the next likely resistance level isn't till about $36.25. If that is broken, look for the price to pierce the June 24 high at $38.52, with little resistance above until $42.25. If the price drops below $30 it shows that the financial sector has stabilized and being long in this inverse ETF isn't recommended. Not for the faint of heart due to the big move potential, ETFs like this are favored by short-term traders and hedgers. 

SEE: Index Investing Tutorial: Introduction

The Bottom Line
When the major stock market indexes are dropping, buying an inverse ETF is a simple way to profit from those market declines. As the market indexes decline these ETFs go up in value. As with any trade it is important to manage risk and ideally use a stop loss on your positions. Even though the S&P 500 and other major indexes may be seeing a pullback, the overall longer-term uptrend remains in tact, and by buying these ETFs you are bucking that trend. With the exception of EUM which shows significant evidence a trend reversal has occurred to the upside, the other three ETFs remain in long-term downtrends and therefore should be used for short-term trades only.

At the time of writing, Cory Micthell did not own shares in any of the funds mentioned in this article.

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