What is the most oversold market right now? Gold.
Going into Tuesday’s trading, it would be a major understatement to say how overbought the broader market has become. Both the ^SPY^ and the ^QQQQ^ have closed not just in overbought territory, but in extreme overbought territory for six consecutive sessions.
By “extreme overbought territory”, I mean a 2-period RSI of more than 90. This is a rare event (I noted how rare in yesterday’s column – click here if you missed it). And it means that the markets are getting ever closer to that moment when those who have made impressive gains on the way up, start thinking about taking profits off the table.
And that profit-taking is often the beginning of the kind of pullback that high probability traders live for.
Until that happens, one place where high probability traders may want to look for markets that have already become oversold is the gold patch.
Of the four exchange-traded funds to make it onto the Most Oversold side of our TradingMarkets Most Overbought and Oversold list for Tuesday, two are gold-related exchange-traded funds: the ^GLD^ and the ^DGP^.
The SPDR Gold Trust ETF closed below its 5-day moving average for the first time since late February. GLD’s pullback was the third consecutive down close for the ETF and brought the fund down into oversold territory above the 200-day moving average.
GLD has an ETF PowerRating of 5.
Also making our modest Most Oversold list for Tuesday was a leveraged gold-related fund (note, actually). The DB Gold Double Long ETN (below).
Like GLD, DGP slid into oversold territory from neutral conditions on Monday, closing below its open for three days in a row. DGP has a Leveraged ETF PowerRating of 6.
The last ETF in today’s report is one that was on the “Most Overbought” side of the Most Overbought/Most Oversold ledger. Also a gold-related fund, the ^DZZ^ closed in overbought territory below the 200-day moving average on Monday.
Overbought markets below the 200-day moving average are markets that high probability ETF traders should avoid or sell short. In the case of DZZ, additional strength below the 200-day moving average – and an even more extremely high 2-period RSI – will likely make DZZ a potential opportunity for high probability traders looking to trade on the short side – even as the rest of the market ramps higher.
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David Penn is Editor in Chief at TradingMarkets.com.