ETF PowerRatings: Pullbacks, Rallies and 10-Rated ETFs

There are many ways to trade exchange-traded funds (ETFs) in the short-term – from buying breakouts to trying to time reversals by picking tops and bottoms.

While many traders have been successful with these short-term trading strategies, our ability to quantify short-term price behavior in markets like exchange-traded funds has led us to a different path. That path is the way of high probability ETF trading, a strategy for short-term trading in exchange-traded funds that relies on buying ETFs not after they have made big moves to the upside, but instead after they have pulled back.

This is not how most non-professional traders trade ETFs. But buying ETFs after they have pulled back and selling them as they recover is a strategy for trading ETFs that we have tested extensively. These tests involved hundreds of exchange-traded funds and thousands of simulated trades going back to 2003 in the case of our ETF PowerRatings.

And what those tests provided us was a way to measure ETFs based on how likely they were to make significant short-term gains. Using a scale of 1 to 10, ETF PowerRatings make it easy for ETF traders to spot those ETFs that have made short-term gains more than 75% of the time (the ETFs rated 8, 9 or 10) as well as those ETFs that are more likely to underperform (the ETFs rated 1, 2 or 3).

Take a look at how some recently, 10-rated ETFs performed after receiving their ETF PowerRatings upgrades to our highest rating.

FXI Chart

Above is an ETF PowerRatings chart of the iShares FTSE/Xinhua China 25 ETF
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. Note how the ET’s ETF PowerRating increases – all the way to our top 10-rating – as the fund pulled back in late October. These ETF PowerRatings upgrades were indicative of a market that was nearly oversold extremes and increasingly likely to reverse to the upside.

Here is another example using the Powershares QQQ Trust ETF
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.

QQQQ Chart

In this instance, the QQQQ continued lower for a few days after earning an ETF PowerRating of 10. But by the time the ETF regained strength, the QQQQ had gained more than 2% from the close on the day it earned its ETF PowerRating upgrade to our highest rating of 10.

With the markets moving higher in recent days, now is a good time to hone your skills as a short-term trader – before the next pullback. Click here to learn more about ETF PowerRatings and the world of high probability trading, with a free, 7-day trial to ETF PowerRatings.

David Penn is Editor in Chief at TradingMarkets.com.