High Probability Trading Report: Best Edges in Leveraged ETFs (QLD, SSO, TYH, DIG, FAS, TNA, ERX)

For high probability traders looking for opportunities to trade extreme pullbacks, the current market offers a number of potential exchange-traded funds (ETFs) that have reached levels from which they have historically advanced. The fact that so many of these ETFs are leveraged ETFs, both 2x and 3x, is especially noteworthy insofar as many of these leveraged ETFs have become favored markets to trade by a growing number of short term traders.

There are two aspects about high probability trading strategies involving leveraged ETFs that are worth noting.

The first is that the 200-day moving average is not a limiting factor. With the majority of our high probability trading strategies – typically involving non-leveraged exchange-traded funds – the 200-day moving average is a key tool in letting traders know whether they should be looking to buy pullbacks or sell rallies. Readers of High Probability ETF Trading, the latest book by Larry Connors and Cesar Alvarez, are familiar with the important role the 200-day moving average plays in our trading strategies with ETFs.

If you have not read High Probability ETF Trading, click here to find out how to get your copy of the book named one of the best trading books of 2009 by SFO magazine.

Leveraged ETFs can also be traded in this fashion. However our research has uncovered an edge that allows traders to potentially buy pullbacks in leveraged ETFs regardless of whether that leveraged ETF is trading above the 200-day moving average. For traders who are trading leveraged ETFs – or are interested in trading leveraged ETFs – applying this edge to your short term trading could go a long way toward improving both your trading accuracy and your overall trading gains.

The edge is in waiting for leveraged ETFs to become not just oversold, not just very oversold, but extremely oversold.

How “extreme” is extremely oversold? At a minimum, high probability traders looking to trade extreme pullbacks in leveraged ETFs should look for 2-period RSI values of 10 or less. An even more conservative trading strategy for trading leveraged ETFs – whether they are 200% or 300% their underlying index – is to wait for those pullbacks to create values of 5 or less in the 2-period RSI.

These will not be attractive looking leveraged ETFs by conventional standards. But these extremely oversold leveraged ETFs will be at levels from which these funds have made significant short term gains. This is based on our historical testing involving thousands of simulated exchange-traded fund trades going back to inception.

Consider for example the current bounces in triple-leveraged ETFs like the ^FAS^ and the ^TNA^, up more than 3% and 2% respectively midday on Friday.

Here are some of the leveraged ETFs that have earned 2-period RSIs of 5 or less going into Friday’s trading that remain at oversold extremes as of midday.


Continued selling in these funds could provide excellent opportunities for high probability traders looking for additional opportunities to take advantage of the relative weakness of the market here in late June.

With Larry Connors’ High Probability ETF Trading Software, short term traders have access to the same kind of “buy the selling, sell the buying” trading strategies that professional traders have used successfully for decades.

Click here to start your free trial to Larry Connors’ High Probability ETF Trading Software today!

David Penn is Editor in Chief at TradingMarkets.com.