After the first hour or two of trading on Friday, it is clear that while buyers may not still be on the offensive, sellers have not yet left the sidelines, either. The result is a market that remains exceptionally overbought going into the weekend.
As I wrote earlier in the week, this kind of market behavior encourages high probability traders to turn their attentions to inverse leveraged ETFs (see my most recent ETF Trading with Ultimate PowerRatings column here.
The fact that markets have become even more overbought since that last report only means that the likelihood of reversal is that much greater. While there are a variety of reasons why equity markets have been marching higher day after day – from short-covering to “don’t leave me out!” bandwagon trading, one thing is for certain. Sooner or later, those who bought will be looking to lock in gains by selling. And in that selling is the potential for a move to the downside that is every bit as powerful as the move to the upside has been.
Trading top rated inverse leveraged ETFs is one of the best ways for high probability traders to take advantage of situations when markets are running away to the upside as they have been for the past several days. Among the top rated leveraged ETFs – leveraged exchange-traded funds earning leveraged ETF PowerRatings of at least 9 – are funds linked to a variety of equity markets from technology to small and large cap stocks, as well as international currencies.
Here are 5 ETFs for the Next 5 Days
Shares of the Direxion Technology Bear 3x Shares (below) have closed with our top leveraged ETF PowerRatings for four consecutive trading days heading into Friday’s trading.
As extremely oversold as this shows the TYP to be, it is not the first time – even in recent trading history – that TYP has earned such high marks. Back in the first half of July, TYP was upgraded to our highest level for four straight trading days before bounding higher by more than 6% on a single day.
Traders looking for a little less leverage than what is provided by the 3x Direxion Technology Bear ETF may want to take a look at the ProShares UltraShort Technology ETF, which is leveraged 2 to 1, rather than 3 to 1. Like TYP, REW has earned leveraged ETF PowerRatings of 10 for the past four days.
Also closing with leveraged ETF PowerRatings of 10 for four days in a row is the Direxion Large Cap Bear 3x Shares (below).
The last time BGZ earned these kind of top PowerRatings was back in early July, as well, leading to a short, sharp rally that allowed traders to exit on strength before the market pulled back again.
All four of the previous instances the summer in which the ProShares UltraShort Euro ETF has earned our top leveraged ETF PowerRating of 10 – early July, mid-July, early August and early September have led to profit-taking opportunities as markets made short term bounces in response to the oversold conditions.
The current top rating in EUO comes after the ETF had been upgraded from 9 two days ago. EUo has closed with a top leveraged ETF PowerRating of 10 for the past two days.
Although not as liquid as some of the other exchange-traded funds for the Russell 1000, the SFK is nonetheless among the top rated leveraged ETFs going into trading on Friday. With an upgrade to 9 and then a boost to 10 for the past four days, SFK has pulled back toward levels from which it has historically advanced and likely be on the radar of high probability traders as long as it remains among our top rated funds.
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David Penn is Editor in Chief at TradingMarkets.com.