As has been the case for the past several days, many of the highest ETF PowerRatings funds going into Thursday’s trading are either country ETFs or commodity-related ETFs. Short term traders looking for good, high probability trading opportunities in exchange-traded funds will likely find some of the better opportunities among funds from these two categories.
Arguably, there is a fundamental relationship between the selling in country ETFs like the ^EWZ^ and commodity-related ETFs such as the ^XME^ (below). Much of the interest in country funds has to do with their growing economies – this is especially true for so-called BRIC nations like Brazil, Russia, India and China. And these growing economies need natural resources the way a growing child needs milk. So to the extent that investors are cooling on the growth prospects for many of these nations, so are they pulling back on their investments in commodities and natural resources.
From the point of view of the high probability trader in general and the ETF PowerRating trader in specific, what matters most are three things when it comes to trading these ETFs:
1. Only buy or scale-in to ETFs trading above their 200-day moving average. Some country funds, such as the popular ^FXI^, have slipped beneath their 200-day moving averages. Our research, when it comes to regular, non-leveraged ETFs, indicates that traders should avoid buying or scaling-in to ETFs after they have dropped below their 200-day.
2. Focus on the 10s. With the exceptional number of top rated exchange-traded funds in our database, high probability traders should stick with the highest rated funds that are the most oversold and have the greatest edges. Our research indicates that there is an edge in buying the highest rated funds. So when there is an abundance of 10-rated ETFs, ETFs that have made significant gains in the short term nearly 80% of the time in our simulated testing, why settle for second place? Focus on the 10s.
3. Country Funds Over Commodity Funds. When it comes to mean reversion trading in ETFs, country funds have proven in our testing to do the best, most consistent job of pulling back after becoming overbought and rallying after becoming oversold. The same cannot be said for commodity ETFs which, compared to country ETFs and equity index ETFs, have a greater tendency to trend, to become and stay overbought and oversold. Given a choice (and again, traders have a number of quality choices among 10-rated ETFs right now), we encourage traders to look first to country ETFs.
High probability ETF traders who stick with these three principles when looking for the best ETFs to buy every day will be trading with the edges, as opposed to against them, increasing their chances of success when it comes to short term trading in exchange-traded funds.
David Penn is Editor in Chief at TradingMarkets.com.