When markets are closing higher day after day, high probability traders who use PowerRatings to help them find the best stocks and exchange-traded fund (ETFs) every day begin looking at the leveraged ETF market – especially the inverse leveraged ETF market.
Why? When stocks and non-leveraged exchange-traded funds become extremely overbought, markets that track the inverse of these markets are becoming extremely oversold. These extremely oversold conditions are what help ETFs like the ^TZA^ (see below) earn our highest Leveraged ETF PowerRatings.
Leveraged ETFs that have earned our highest Leveraged ETF PowerRatings have made significant short term gains compared to the average – or low-rated – leveraged ETF. For example, leveraged ETFs that earn Leveraged ETF PowerRatings of 9 have made significant short term gains more than 74% of the time based on our historical testing. Leveraged ETFs that have earned our highest Leveraged ETF PowerRatings of 10 have performed even better in our quantified backtests, making significant short term gains more than 78% of the time.
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In addition to TZA, there are a number of other leveraged ETFs that have earned top ratings going into trading on Tuesday.
Among the most widely traded ETFs, for example, is the ^SDS^ (below), which earned a Leveraged ETF PowerRatings upgrade from 9 to 10 as of Monday’s close.
SDS has not had a top Leveraged ETF PowerRating of 10 since early July. Then, four consecutive days with a Leveraged ETF PowerRating of 10 helped alert traders to a short term bounce of more than 5%.
In addition to equity index leveraged ETFs, leveraged funds representing sectors have also earned Leveraged ETF PowerRatings upgrades that traders should know about. These include Leveraged ETF PowerRatings upgrades in the ^ERY^ and the ^TYP^. Shares of ERY earned a one-point upgrade from 9 to 10 as of Monday’s close, while shares of TYP earned a two-point boost from 8 to 10 as they pulled back to a new, short term low.
TYP was last a 10-rated leveraged ETF in early July, around the same time that SDS earned its last Leveraged ETF PowerRatings upgrade to 10. But shares of ERY were 10-rated as recently as early August. At the time, the 10-rating in ERY marked a significant major intermediate term low. Earning a 10 and closing at just north of 45, ERY rallied over the balance of the month, closing as high as 59.82 by the final week of August.
One leveraged ETF that high probability traders certainly will be keeping an eye on is the ^FAZ^.
Shares of FAZ earned a Leveraged ETF PowerRatings upgrade from 9 to 10 on September 3rd. After a very modest bounce that brought the fund’s Leveraged ETF PowerRatings down to 8 and 9, the Direxion Daily Financial Bear 3x Shares ETF has earned its top rating back, and is again one of the highest rated exchange-traded funds in our database.
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David Penn is Editor in Chief at TradingMarkets.com.