High Probability ETF Trading: Strategies for Selling the Buying in SPY, QQQQ, IWM and More
The strong rally on Wednesday brought a large number of exchange-traded funds (ETFs) back into overbought territory. And with many of those ETF markets continuing to advance deeper into overbought territory in the first few hours of Thursday’s trading, potential opportunities on the short side may be developing for high probability ETF traders.
First and foremost, three of the major equity ETFs – the ^SPY^, the ^QQQQ^ and the ^IWM^ – closed in overbought territory below the 200-day moving average on Wednesday. As long as these exchange-traded funds remain overbought below the 200-day, they will remain “in the sights” of high probability ETF traders looking to take advantage of markets at historic extremes.
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In addition to the Big Three of the SPY, the QQQQ and the IWM, there are a number of other widely-traded ETFs that have become increasingly overbought below the 200-day moving average. Keep an eye on these ETF markets as buyers continue to press the offensive in the days leading up to the three-day Labor Day Weekend.
The ^XLF^ are among the sector-based ETFs to have climbed back into overbought territory below the 200-day moving average. Following-through to the upside early on Thursday, the current rally in the XLF represents the fourth time this summer that the ETF has closed in overbought territory.
International funds like the ^EFA^ are also overbought below the 200-day.
Although showing less upside follow-through compared to other ETFs that bolted higher on Wednesday, shares of EFA are spending a second session in overbought territory and will likely make it on the watch lists of high probability ETF traders should the fund close in overbought territory below the 200-day for a second day.
Other international equity ETFs that have closed in overbought territory below the 200-day include the ^EWQ^ and the ^EWG^.
Shares of EWG were overbought below the 200-day moving average as recently as two weeks ago. Then, two consecutive closes in overbought territory below the 200-day provided an excellent opportunity for high probability ETF traders who were able to lock in gains on the short side one day after the second close at overbought levels (see below).
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David Penn is Editor in Chief at TradingMarkets.com.