High Probability ETF Trading Analysis: Oversold Country ETFs in Russia and South Africa

Monday’s sell-off sent many exchange-traded funds reeling, with many that had been in retreat for the past several days continuing to move lower. Some ETFs – particularly those in the energy sector – even slipped back below their 200-day moving averages.

Energy Select Sector SPDR ETF – XLE

XLE Chart

Many of these energy ETFs – from the Energy Select Sector SPDR ETF
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to the Vanguard Energy ETF
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– are showing modest strength early on Tuesday. But high probability ETF traders may find oversold opportunities among dramatically oversold country ETFs to be more to their liking.

Market Vectors Russia ETF – RSX

RSX Chart

Why? As I noted in my series, Choosing the Right ETFs for High Probability ETF Trades , our testing of hundreds of exchange-traded funds revealed that country ETFs do a better job of moving back and forth from oversold to overbought than do sector ETFs. In other words, the characteristic of mean reversion – which is at the heart of high probability ETF trading – is far more pronounced with country ETFs.

All else equal, we will choose to trade country – or equity index – ETFs over sector ETFs.

Even more importantly, not only do country ETFs tend to do better than sector ETFs when it comes to high probability ETF trading, they also are preferable to commodity ETFs – and this includes sector ETFs that are based on commodities, such as energy sector ETFs.

This is because, as many traders know, commodities have a greater tendency to trend – or to become overbought (or oversold) and stay that way. While there are some mean reversion tendencies among commodities such as oil and gold, our testing shows that those tendencies are not nearly as strong as they are in country ETFs and equity index ETFs.

iShares MSCI South Africa Index ETF – EZA

EZA Chart

Does this mean that traders cannot use commodity ETFs for high probability ETF trades? No. But it does mean that traders should establish a sort of “pecking order” when it comes to deciding which ETFs are the best for maximizing the edges in high probability ETF trading. That “pecking order” should look something like this:

1. Country ETFs/Equity Index ETFs

2. Sector ETFs

3. Commodity ETFs

According to a recent report, eight out of ten securities traded are exchange-traded funds. Want to learn how to trade them? Click here to order High Probability ETF Trading,the first quantified book of trading strategies to improve your ETF trading.

David Penn is Editor in Chief at TradingMarkets.com.