After several days of overbought conditions, a number of exchange-traded funds (ETFs) have experienced some modest profit-taking. This profit-taking has resulted in a number of country ETFs and sector ETFs pulling back into oversold territory ABOVE the 200-day moving average.
As those familiar with the principles of high probability know, exchange-traded funds that are oversold above the 200-day moving average are the starting point for traders looking to take advantage of historical, quantified edges in ETFs. As Larry Connors and Cesar Alvarez show in their award-winning book, High Probability ETF Trading (click here to order your copy), buying ETFs after they have pulled back has historically outperformed buying ETFs after they have made short term gains.
With this in mind, let’s take a look at some exchange-traded funds that have become oversold above the 200-day as the trading week begins.
As I noted at the outset, many of the ETFs that have become oversold above the 200-day are country funds. This includes both specific country ETFs like the ^EWZ^ and the ^EWA^, as well as regional funds like the ^EFA^ (below).
EFA has closed lower for the past two consecutive trading days, closing in oversold territory above the 200-day moving average on Monday. EFA has not been in oversold territory above the 200-day moving average since late April and has spent the majority of the time since then below that critical level.
In addition to regional funds like EFA that are oversold above the 200-day moving average, the ^ILF^ has also retreated to levels from which it has historically advanced.
One exchange-traded fund that is oversold above the 200-day moving average going into Monday’s trading is the ^SPY^.
Among the most widely-traded ETFs in the market, the SPY began pulling back above the 200-day on Thursday, closing in oversold territory on Friday. Continued weakness above the 200-day likely will provide opportunities for short term, high probability traders looking to buy weakness and sell strength in the current market.
In addition to these equity index ETFs, there are a pair of sector exchange-traded fund that have also become oversold above the 200-day and may be potential targets for high probability traders over the next few days. These sector ETFs are the ^XLB^ and the ^XLP^ (below).
The XLP dropped from overbought territory as of Thursday’s close to oversold territory as of Friday’s close. Although the fund is bouncing modestly early in trading on Monday morning, any return of weakness will put the stock back at levels from which it has historically advanced.
Markets only move in three directions: up, down and side to side. Click here to learn why combining quantified mean reversion (pullback) strategies with quantified trend following strategies can be an excellent way for traders and investors to put money to work in all kinds of market conditions.
David Penn is Editor in Chief at TradingMarkets.com.