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Often when bull markets have a lot of momentum behind them, stocks and ETFs have a hard time staying oversold for very long. This appears to be the case today as a number of ETFs that slid into oversold territory on Tuesday are already rallying higher early in trading on Wednesday.
This means the wealth of oversold ETFs we have seen in the past few days (be sure to check out our daily TradingMarkets Most Overbought and Most Oversold ETFs for Today column for the most up-date analysis of overbought and oversold conditions in exchange-traded funds) has largely vanished.
For high probability ETF traders, the task at hand is two-fold: first, we want to see if there are any extremely oversold ETFs that have not yet attracted significant buyers. And, second, we want to look out for those ETFs that are pulling back while the rest of the pack moves forward.
In the first instance, there are stocks like the iShares MSCI Malaysia Index ETF (EWM | Quote | Chart | News | PowerRating)
And, perhaps even more attractive, the India Fund (IFN | Quote | Chart | News | PowerRating), which closed lower for five out of the past six days on Tuesday and is down again today.
As you may have noticed, stock ETFs and bond ETFs have been moving in opposite directions. This means that as stock or equity ETFs are climbing, bond ETFs are likely pulling back and potentially creating high probability opportunities for short term traders. Among the bond ETFs that are moving lower early in trading on Wednesday is the iShares iBoxx Investment Grade Corporate Bond ETF (LQD | Quote | Chart | News | PowerRating)
LQD is not yet in oversold territory above the 200-day moving average. But if the reverse correlation between stock and bond ETFs continues, then higher stock prices are likely to create even deeper pullbacks in fixed income exchange-traded funds.
David Penn is Editor in Chief at TradingMarkets.com.
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