High Probability ETF Trading Report: Overbought Financials, Oversold Commodities
For high probability ETF traders looking for the biggest edges in the ETF market right now, two places to look right now appear to be the financials and the commodities – particularly gold and oil-related funds.
Although our roster of overbought and oversold ETFs is not huge as of Wednesday morning, we can see a few distinct patterns emerging that may serve as a guide for high probability traders over the next few days.
Among financials, for example, we see that both the SPDR KBW Regional Banking ETF
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KRE (above) has closed higher for the past five days in a row below the 200-day since bottoming about a week ago. The ETFs 2-period RSI over that time, for example, has increased by more than 2.8x – with the past two days featuring closes with an RSI(2) of more than 90.
UYG (above) has also closed higher for the past consecutive days, but its ride through overbought territory has been a little more volatile than that of KRE, particularly with buyers being a little less aggressive on Tuesday.
Both ETFs are more than 1.5% below their 200-day moving averages, which means that high probability traders can consider them as potential trading candidates to the downside on continued overbought conditions.
I also mentioned commodity ETF. Remember, when it comes to trading high probability ETF strategies, commodity ETFs rank lower on the list than country ETFs, equity index ETFs and sector ETFs. This is because our research has indicated that commoditiy ETFs tend to be less reliable than others when it comes to moving back and forth between overbought and oversold conditions.
Because this movement is the hallmark of high probability, mean reversion trading, we tend to only take advantage of opportunities in commodity ETFs when they are at truly extreme overbought or oversold conditions.
So far, few commodity ETFs have reached that point. But traders should keep an eye on a number of commodity ETFs that have attracted profit-takers in recent days. These include the Oil Service HOLDRS ETF
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PowerRating) (below).
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David Penn is Editor in Chief at TradingMarkets.com.
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