3 ETFs that are ready to rally
Below is a chart of the Nasdaq 100 with the
standard 20-period, 2 standard deviation Bollinger Bands. Since market tend to
oscillate, a large majority of the time prices will close somewhere between
these bands. In most cases a move near or through one of these bands will be
quickly followed by a move in the opposite direction. The extremely sharp
selloff the market has undergone in the last week has changed the picture
dramatically.
You’ll notice that the
(
NDX |
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PowerRating) has now closed below its lower Bollinger Band
for 5 days in a row. This has only happened 5 other times since the inception of
the index. Those other times were 9/15/86, 7/27/88, 12/15/89, 3/30/94, and
9/21/01. In every case the market closed higher 1 week later. The rise over the
next week ranged from 1.68% to 3.84% with 2.82% being the median.
Does this mean we are guaranteed to get a nice bounce sometime in the next few
days? No. I believe it is likely, though. I am therefore continuing to scale in
to those areas that are most likely to bounce. Yesterday I published a list of
7 ETF’s that were most primed for a short-term bounce. Some additions to
that list would include
(
IBB |
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PowerRating),
(
XLB |
Quote |
Chart |
News |
PowerRating), and
(
EFA |
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Chart |
News |
PowerRating).
When looking to buy oversold sectors in anticipation of a bounce it is important
to start with small positions and continue to scale in. Oversold can become very
oversold and very oversold can lead to panic selling. You don’t want to get
creamed if your timing is early…for example…
While the record of buying the NDX when it closes below its lower Bollinger Band
5 days in a row and selling a week later is perfect, 4 closes below it isn’t
nearly as good. This has happened 11 times. Seven were profitable. Of the 4
unprofitable, one included the Crash of 1987.
I don’t believe we are about to crash. I do think there are some very good
short-term oversold opportunities out there, but proper position sizing is key.
Intermediate-term, I think this market has quite a bit further to fall. The
bounce I am anticipating I believe will be just be a respite before prices
ultimately head lower. I’ve been warning for some time and now I believe the
correction may be upon us. Intermediate-term traders should consider lightening
up on any remaining positions when the market does bounce.
Best of luck with your trading,
Rob
For those who may be looking to expand their
knowledge beyond just market timing, my
Hanna ETF Money Flow System utilizes the VIX in generating trading
signals for spread trades.
Rob Hanna is the principal of a money
management firm located in Massachusetts. He has spent the last several years
developing and refining methods for trading in stocks across multiple time
frames. He selects stocks using both fundamental and technical criteria, and
then trades them using technical analysis techniques.