ETF PowerRatings Strategies for Traders: Pullbacks in Financial ETFs
With markets rallying back into overbought territory after a single, one-day pullback, it is clear that buyers remain in the driver’s seat.
We have noticed some select weakness in certain areas over the past few days, especially in financially-related ETFs and those with exposure to real estate, including REIT – and home construction based funds. The fact that these kinds of sectors have played a leadership role in driving the equity markets higher may mean that there is some broader significance in the fact that funds from these sectors seem to be leading a potential pullback.
But we’ll leave the prognostication and “Bigger Picture” for others. Our task as high probability traders using ETF PowerRatings is simply to find the best ETFs – those with the highest possible ETF PowerRatings – to buy them on pullback and then sell them back into strength after they have recovered.
Recall that the highest rated ETFs – those ETFs with PowerRatings of 10 – have made significant gains in the short term nearly 80% of the time. Even those ETFs with PowerRatings of 9 have rallied in the short term more than 75% of the time.
Currently, with the markets overbought, the highest ETF PowerRatings achieved as of the Monday close were 7 – a good, but not ideal PowerRating for an ETF. That said, high probability traders should keep an eye on these 7-rated ETFs in the event that profit-taking helps encourage the kind of selling that will earn some of these 7-rated ETFs into 9s or even 10s over the next few days.
Among the financial ETFs showing some weakness is the iShares Dow Jones U.S. Broker-Dealer Index ETF
PowerRating). With an ETF PowerRating of 7, IAI is trading at more or less neutral levels and has actually gained ground over the past two days. This advance has yet to set up a new short term high, however.
Also mired in neutral territory is the 7-rated Dow Jones Wilshire REIT ETF
PowerRating). RWR has earned a 2-period RSI of just under 61, which means that the ETF could as swiftly move to either overbought or oversold territory. A pullback below recent short term lows would be the first step toward an ETF PowerRating upgrade toward the “Consider Buying” range of 8, 9 or 10.
Lastly, there is one 7-rated ETF that – at least according to its 2-period RSI – might be even closer to an ETF PowerRatings upgrade. That ETF is the Regional Banking HOLDRS ETF
PowerRating), which has closed lower for the past two days in a row for a two-day drop of more than 3%. Continued weakness in RKH is almost sure to produce a significant PowerRatings upgrade in this sector ETF – and a potential high probability ETF trade.
The highest-rated ETF PowerRatings funds have rallied in the short term nearly 80% of the time. Click here to launch your free trial to our new ETF PowerRatings!
David Penn is Editor in Chief at TradingMarkets.com.