High Probability ETF Trading Report: Oversold Commodity ETFs: SLV, GLD, DBB
When it comes to choosing high probability ETF trading opportunities, Larry Connors — author of High Probability ETF Trading — noted that there are distinctions with differences when it comes to mean reversion and short term exchange-traded fund trading.
Specifically, Larry revealed that of all the different types of ETFs, equity index ETFs (like the iShares Russell 2000 Index ETF
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PowerRating)) and country ETFs (such as the Market Vectors Russia ETF
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PowerRating), tend to revert to the mean more consistently than sector funds. An example of a sector fund might be the Financial Select Sector SPDR ETF
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PowerRating) or the ProShares Ultra Basic Materials ETF
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PowerRating).
What does this mean? It means that equity index ETFs and country ETFs move back and forth between overbought and oversold conditions more regularly than sector funds. As mean reversion traders that look to buy oversold markets and sell short overbought ones, this tendency makes equity index ETFs and country ETFs the top choice for high probability ETF trading.
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Larry further discovered that sector funds — while not as ideal for high probability trading as country funds and equity index ETFs — tend to revert to the mean more frequently than commodity or currency based ETFs. What makes this especially interesting is that examples of commodity ETFs include many of the ETFs that are oversold in the ETF market place right now.
The iShares Silver Trust ETF
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PowerRating), the SPDR Gold Shares ETF
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PowerRating) are examples of commodity ETFs — ETFs that are based on commodities and commodity prices rather than equities/stocks. Because of this, these ETFs tend to move differently from equity-based ETFs, tending to trend more and revert to their mean less frequently.
Does this mean that there are no real opportunities among the growing number of commodity — especially gold and precious metal — ETFs? No. In our testing, we included ETFs like GLD and while those ETFs did not perform as well as the equity index, country and sector ETFs, they did produce positive results in our high probability ETF trading strategies.
But the question is this: do you want to trade the best edges? Those edges that have had the highest historical rates of success? If so, then you might want to keep any trading in this oversold gold and silver ETFs on the light side while waiting for potentially better opportunities in equity index and country ETFs that may follow.
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from the book.
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David Penn is Editor in Chief at TradingMarkets.com.