Waiting for an exchange-traded fund to earn our lowest “consider avoiding” level of 1 out of 10 is among the most straightforward ways to trade ETFs to the downside. Especially when these 1 ratings appear in funds trading below their 200-day moving average, these major ratings downgrades are among the most worth watching signals in the stock market for traders looking to sell markets short.
An ideal example of this sort of opportunity developed late last week, as a number of country fund ETFs became increasingly overbought in bear market territory. Among these exchange-traded funds was the iShares MSCI France Index Fund ETF (NYSE: EWQ). EWQ had closed higher for six out of seven sessions in early February, and had reached technically overbought levels below the 200-day moving average. In fact, in the five days leading up to trading on Thursday, February 9th, shares of EWQ had earned “consider avoiding” ratings of 2 or 3 out of 10 every single session.
As such, it was little surprise to those watching the ETF when a further higher close deeper into overbought territory brought EWQ a further point downgrade to 1 out of 10, our lowest level. At this point, there was no reason for any trader or active investor concerned about the near-term to remain in the ETF. Statistically speaking, the fund’s low rating was a signal that the ETF would be likely available at significantly lower prices over the next few days.
The signal on Thursday in EWQ was timely, indeed. On Friday, shares of EWQ opened sharply lower, and continued down over the course of the trading day. By the time the closing bell rang on Friday, EWQ had dropped by nearly two and a half percent.
Knowing when to sell an ETF short can be a very difficult proposition, even for experienced traders. For every instance of an ETF collapsing the moment it enters technically overbought territory, there often seems to be another example of an exchange-traded fund that becomes overbought and remains overbought for day after day after day. But by waiting for markets to become extreme and for edges to become almost overwhelming, short-term traders and active investors can make the most out of even the most volatile markets.
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