And the Short Shall Inherit the Earth: Swing Trading and Inverse ETFs
Turnaround Tuesday lived up to its name in spades yesterday, as stocks reversed to the downside just one day after reaching short-term overbought extremes to the upside.
Yesterday’s column, ( “Swing Trading the Good, the Bad and the Ugly”) highlighted a trio of ETFs that had earned Short Term PowerRatings of 8. These three exchange-traded funds were all short or inverse funds, meaning they track the opposite of a major market index or sector.
I wanted to introduce them, as I did the previous set of ETFs, because while our regular fare here is on stocks, our true focus in on our Short Term PowerRatings. And when there are few — if any — stocks worth trading at any given point in time, we have no problem applying our Short Term PowerRatings to the world of exchange-traded funds.
Fortunately, as was the case the last time I offered a few high Short Term PowerRating ETFs, all three in yesterday’s report made sizable gains in just a day. One of the three was up more than 11% on Tuesday.
If you took advantage of those opportunities in those exchange-traded funds, then my suggestion is not to overstay your welcome. Our Short Term PowerRating ETF swing trades are just like our Short Term PowerRating stock swing trades. We take advantage of short term, but often powerful, shifts in market sentiment from fear to greed. This is the essence of the mean reversion that gives our approach to swing trading a quantifiable, high probability edge.
Even given the intensity of Tuesday’s sell-off, the markets are in more of a neutral mode than an oversold one. This means that swing traders should be sensitive to the potential for further weakness — though stocks are in now way still overbought in the short term, especially Nasdaq stocks.
As such, no stocks or ETFs for today. We’ll remain patient and wait for the next round of set-ups.
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