How to Trade ETFs: Strategies for the Short Side
Amid fears of unemployment levels reaching double-digits, traders and investors were nevertheless in a buying mood early on Tuesday, driving the Dow Industrials, Nasdaq and S&P 500 higher by more than 4% in the first hour of trading.
iShares FTSE/Xinhua 25 Index ETF
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PowerRating) Short Term PowerRating 4
One of the puzzles of successful short term trading is that what often seems like the easiest trade to make is often not the best trade. For example, every time the market has rallied over the past year and a half, we have found those rallies to be excellent opportunities to sell stocks and ETFs, not to buy them.
Energy Select Sector SPDRS ETF
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PowerRating) Short Term PowerRating 5.
Sure, it sounds like a sensible trading strategy now – with the markets off several hundred points from their October 2007 highs. But generally speaking, it is not easy to be a buyer when stocks and exchange-traded funds have moved lower – often dramatically so – day after day. And it is not easy to be a short seller of stocks and ETFs when markets are moving higher, sentiment growing more bullish, and the ever-present, perma-bull financial media cheering from the sidelines.
Financial Select Sector SPDRS ETF
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PowerRating) Short Term PowerRating 8
But our research indicates that, for short term trades, there is an edge in buying oversold markets and selling overbought ones. We make this edge even better by only buying oversold markets that are trading above their 200-day moving averages and only selling short overbought markets that are trading below their 200-day moving averages. Short term traders of stocks and ETFs who have incorporated this thinking into their trading strategy over the past several weeks can likely attest to the soundness of this approach to short term trading. It has been the secret to our success since this bear market began.
iShares MSCI Taiwan Index ETF
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PowerRating) Short Term PowerRating 3
Why bring this up now? With stocks truly soaring in early trading on Tuesday, sentiments are likely to swing radically from despair to a “light at the end of the tunnel” euphoria should this buying be sustained into the close. And while it is possible that this move higher will be THE move higher that traders and investors (and politicians and constituents!) have been waiting for, we prefer to stick with probabilities rather than predictions. And that means we will be watching to see which ETFs trading below their 200-day moving averages become the most overbought over the next few days. And when we spot them, as we have for months now, they will be among our targets for short sales.
iShares MSCI Brazil Index ETF
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PowerRating) Short Term PowerRating 4
Listed throughout today’s report are some of the ETFs that I am keeping an eye on right now. On an intraday basis, they represent some of the most overbought ETFs below their 200-day moving averages and may be among those most likely to reverse back to the downside after their bear market bounces have run their course.
All of these ETFs have 2-period RSIs of more than 80 intraday on Tuesday. Remember that when looking for stocks or ETFs to move lower, we are looking for lower Short Term PowerRatings (ideally 3 or less) which underscore selling or short selling opportunities, rather than higher Short Term PowerRatings, which indicate opportunities to buy.
David Penn is Editor in Chief at TradingMarkets.com.