High Probability Trading Report: Strategies for Shorting the Shorts in SDS, SKF, TWM

Are we in a bull market? Are we in a bear market? Or somewhere in between?

And, most importantly, how are high probability traders supposed to trade the current environment?

For high probability traders, the reality of the current market is that many, many exchange-traded funds, from the ^SPY^ (below) to the ^EWZ^ are trading below their 200-day moving averages – and have done so for the past several days.

SPY Chart

This means that despite what may be said in the financial media, despite what any individual traders or group of Sage Market Observers says, your objective as a high probability trader at the present time is to locate markets that have become overbought below the 200-day moving average for potential short sales.

For most high probability traders, these markets will be ETF markets. There are scant set-ups on the long or short side for high probability traders trading stocks. And long set-ups for ETFs have been similarly scarce in recent days. And while the potential opportunities on the short-side have not been overwhelming, as long as a sizable number of exchange-traded funds (ETFs) remain below their 200-day moving averages, it is likely that the majority of high probability set-ups will be found on the short side. At least for now.

Here are some of the exchange-traded funds that are trading below their 200-day moving averages, but have become increasingly overbought in recent days. Interestingly – but not surprisingly – the majority of them are short ETFs. Here are five of the most overbought and potentially most vulnerable to short term reversal.

^SKF^ (below)

SKF Chart

All this said, traders should not become complacent. A strong week or two could very easily send many ETFs back up over their 200-day moving averages, forcing high probability traders to potentially return focus to trading opportunities on the long side.

Of course, one easy way to always remain on the right side of the market – whether it is trading above the 200-day moving average or below it – is through High Probability ETF Trading Software. High Probability ETF Trading Software takes into account the bull/bear debate as exchange-traded funds near the 200-day moving average, as well as a variety of other quantified factors in order to let traders know how to put the most high probability trading edges on their side.

To learn more about how to trade ETFs in both bull markets and bear markets using High Probability ETF Trading Software, click here.

David Penn is Editor in Chief at TradingMarkets.com.