What do high probability traders who buy exchange-traded funds on pullbacks trade when those exchange-traded funds don’t pull back?
This is the question that many high probability traders have been dealing with over the past several days, as overbought conditions in ETF markets like the ^SPY^ and the ^IWM^ only become more overbought day after day after day.
Consider this: the SPY has closed in overbought territory above the 200-day moving average for nine consecutive trading days. The IWM has done the same – as has the ^QQQQ^. The QQQQ, in fact, is among the most overbought exchange-traded funds in our database (along with its leveraged cousin, the ^QLD^).
^FAZ^. Leveraged ETF PowerRating of 10.
The first option, always, is to wait for markets to pull back. Although it may not seem so, profit-taking comes to all markets and will arrive to the current market sooner or later. And that profit-taking likely will create a number of pullbacks and oversold conditions in different ETFs that high probability traders who are patient will be able to take advantage of.
^TYP^. Leveraged ETF PowerRating of 10.
The second option, however, is to trade inverse leveraged ETFs. When markets like the SPY and the QQQQ and the IWM are becoming more and more overbought, ETF markets like the ^SDS^ and the ^QQQQ^ and the ^TZA are becoming more and more oversold. And the same research that has shown a quantified edge when it comes to buying oversold regular ETFs, also shows a quantified edge when it comes to buying oversold inverse leveraged ETFs.
^UGL^. Leveraged ETF PowerRating of 9.
Right now, there are three ETFs in particular – two of which are inverse leveraged ETFs – that traders looking for radically oversold markets should keep an eye on. I’ve included the names and charts of those three funds in this report. These ETFs have also earned top Leveraged ETF PowerRatings of 9 or higher. This puts them in that category of ETF that has historically made significant short term gains nearly 80% of the time.
Find out more about what Leveraged ETF PowerRatings can do for you and your trading. Click here to launch your free, 7-day trial to our Leveraged ETF PowerRatings today.
David Penn is Editor in Chief at TradingMarkets.com.