The End or the Beginning? Swing Trading the Pullback
Overbought conditions once again resulted in selling, as traders took short-term gains on Tuesday, sending stocks broadly lower.
In yesterday’s column (“5 PowerRatings ETFs for the Next 5 Days”) I suggested that it might be time for those who trade stocks or trade ETFs using Short Term PowerRatings to consider wading into the water.
Of the 5 ETFs suggested as potential starting places for swing traders looking for the best opportunities, three were profitable as of the Tuesday close. The other two, one short the Nasdaq 100 and the other, a leveraged short against semiconductor stocks, were down, reflecting the fact that technology was one of the few areas to move higher on the day. Both of these ETFs — the ProShares Short QQQ ETF, PSQ
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PowerRating) and ProShares UltraShort Semiconductor ETF, SSG
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PowerRating) — have Short Term PowerRatings of 8 and may still be considered by traders looking to take positions in oversold ETFs.
The sell-off puts us out of “new position” mode, for the most part. After reaching overbought levels on Monday’s close and not seeing follow-through to the upside on Tuesday, swing traders are in a position to spend most of their time managing their long positions in high Short Term PowerRatings stocks and ETFs — and managing their short positions in any low Short Term PowerRatings stocks and ETFs.
The Tuesday sell-off also leaves the markets in a fairly neutral position of being neither overbought nor oversold. This also means that the number of quality opportunities — pullbacks above the 200-day moving average and bounces below the 200-day moving average — are fewer in the immediate term. Additional selling — or renewed buying — could change all of this dramatically in a relatively short period of time. Where they are not managing positions taken in the past few days, swing traders should be waiting for the next round of set-ups.