Whenever an exchange-traded fund earns a “consider buying” rating of 8, 9 or 10, we know that the data is telling us that the fund has moved to a level where it has historically been able to attract at least short-term buying interest. This is why ETFs that earn ratings of 8 or higher are the kind of “consider buying” funds that we highlight as potential short-term trading opportunities for active investors looking to buy weakness and sell strength.
But when an ETF earns that upgrade to “consider buying” territory by way of a sharp, three-point upgrade, the potential for a sizable near-term move is often all the more worth looking for.
Shares of the ProShares UltraShort MSCI EAFE ETF (NYSE: EFU) earned a major, three-point ratings increase from a “neutral” 6 out of 10 to a “consider buying” 9 out of 10 on the first trading day of the year. The ETF, which represents equity markets in developed countries other than the US and Canada, had closed lower for three days in a row, losing more than 9% and becoming deeply oversold in the short-term.
Traders who avoid ETFs below the 200-day moving average may have passed on EFU. But those who did take advantage of the ratings upgrade in the ETF, buying the fund on its upgrade to 9, were able to exit the position three days and more than 7% to the upside later.
For those traders who draw a line in the sand at the 200-day moving average, there were a number of other opportunities in “consider avoiding” funds earning 2 out 10 ratings last week such as the iShares FTSE/Xinhua China 25 Index Fund ETF (NYSE: FXI) and the iShares MSCI South Africa Index Fund ETF (NYSE: EZA). Both FXI and EZA sold off for three days in a row after earning 2 out of 10 ratings near the beginning of the week.
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David Penn is Editor in Chief of TradingMarkets.com