High Probability ETF Trading: Oversold India and Strategies for the Energy Patch

With U.S. markets continuing to be significantly overbought, high probability traders have had to be more persistent and creative when it comes to finding top quality trading opportunities.

As I have written recently, some high probability traders have taken to the short side of the market, taking advantage of overbought conditions below the 200-day moving average in exchange-traded funds (ETFs) like the ^FXI^.

Other high probability traders looked to inverse leveraged ETFs – a number of which have become extremely oversold as non-inverse ETFs have become increasingly overbought. One prominent example of a very oversold inverse leveraged ETF would be the pullback in the ^SSG^. SSG was among the first inverse leveraged ETFs to break down into oversold territory, drawing the attention of many high probability traders.

School’s in session! Click here to join Larry Connors Tuesday, February 23rd at 4:30 p.m. Eastern for a free introduction to the Spring 2010 TradingMarkets Swing Trading College.

Going forward, current overbought conditions will beget a pullback sooner or later. For now, there are a few ETFs that have pulled back that traders should start to take a look at. Should we get a broader market pullback over the next few days, it is likely that these funds will be among those becoming most oversold earliest.

First, a pair of ETFs representing Indian stocks have moved into oversold territory above the 200-day. These exchange-traded funds are the ^EPI^ and the ^INP^ (below).

INP Chart

In addition to these country funds, the most oversold sector right now is clearly energies. Of the 12 exchange-traded funds that made it to our Most Oversold ETFs roster for Tuesday, almost half are energy-related funds like the ^IEO^ and the 2x leveraged, ^DIG^ (below).

DIG Chart

Commodity ETFs like the ^GDX^ and the ^IGE^ are also among those ETFs newly in oversold territory ahead of Tuesday’s trading.

David Penn is Editor in Chief at TradingMarkets.com.