High Probability ETF Strategies: Pullbacks in Housing, Small Cap Growth, and the UK

The number of potential high probability ETF set-ups for short term traders as of the Friday close has only continued to increase. Profit-taking in the broader market has started to slip toward a bit of panic and anxiety selling as commodities plunge and the U.S. dollar gains strength. For those traders convinced that the current rally in stocks is based on risk appetites and inflation expectations, falling commodity prices and a rising dollar are among reasons to sell.

For traders relying on high probability ETF strategies, the current selling may represent more an opportunity to buy than an opportunity to sell – especially at this point with the major market indexes down in exceptionally oversold territory above the 200-day moving average.

For today’s high probability ETF strategies report, I wanted to focus on those most oversold ETFs that short term traders should be focused on over the next few days. They represent respectively stocks in the housing and construction sector, stocks in the small cap growth sector, as well as European shares.

iShares Dow Jones U.S. Home Construction Index ETF
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closed with a 2-period RSI of less than one on Friday and has begun to see some buying pressure early on Monday.

ITB Chart

Unlike many home building ETFs, ITB consists almost exclusively of actual home building stocks such as Pulte Homes
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and Lennar Corporation
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. Other home building ETFs – such as the almost equally oversold SPDR S&P Homebuilders ETF
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– also include stocks of building materials companies like Owens Corning
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.

One of the more oversold “types” of stock right now are small cap growth stocks. Small cap growth stocks are the adrenaline of a stock market – especially early in a significant advance – so it is little surprise that many of these stocks have been owned over the past several months and now, are being sold.

IWF Chart

The iShares Russell 1000 Growth Index ETF
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closed lower for four days leading into Monday’s trading. Like ITB, buyers have begun to return to IWF early in trading on Monday, boosting the ETF into neutral territory above the 200-day moving average.

Lastly, there are a few country ETFs that remain very much under selling pressure as Monday’s trading begins. Among the most oversold of those is the iShares MSCI United Kingdom Index ETF
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EWU Chart

Trading in EWU on some days has been relatively slight, but the ETF has closed lower for the past six consecutive trading days leading into Monday’s trading. Of the ETFs in today’s report, EWU is the one that has bounced the least so far in trading on Monday. This makes EWU among those country ETFs that high probability traders should be watching in the event that early buying returns to selling.

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David Penn is Editor in Chief at TradingMarkets.com.