PowerRatings and Short ETF Profit-Taking
Stocks sold off for a second consecutive session on the S&P 500, Dow and Nasdaq — creating mildly oversold conditions below the 200-day moving average.
Looking back at the 5 PowerRatings Stocks for the Next 5 Days column — the St. Patrick’s Day edition — we see that three of the high Short Term PowerRatings ETFs that made the grade that day, ProShares UltraShort Dow 30 ETF
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PowerRating), ProShares UltraShort S&P 500 ETF
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PowerRating), and Rydex Inverse 2x S&P 500 ETF
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PowerRating) have rallied over the past two days to climb into or near overbought territory above the 200-day moving average.
For short term traders who took advantage of these opportunities last week, the time for profit-taking is likely near. Not only have all three of these short ETFs re-entered overbought territory, but also all three have closed above their 5-day moving averages.Â
When buying weakness and selling strength, there are a number of ways of knowing when the time has come to exit a trade. The move from oversold to overbought is one signal. A close above a short term moving average like the 5-day is another.
A third, of course, is a decrease in the stock or ETFs Short Term PowerRating — especially if that downgrade drops the stock or ETF from the 10, 9 or 8 range. This is yet another signal that the market we may have bought in is starting to accumulate significant numbers of buyers — buyers who will sooner or later be looking to take profits, themselves, creating yet another pullback or correction.Â
Also mentioned in the St. Patrick’s Day report were a fourth short ETF, ProShares UltraShort Utilities ETF
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PowerRating), and a stock, Zion Oil & Gas Inc.
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PowerRating). The short ETF — although up by more than 1% on Friday — may still represent opportunity in the short term. Not only has SDP’s 2-period RSI remained under 25, but also SDP has yet to close above its 5-day moving average. Both of these are indications that the ETF has not yet attracted a surplus of buyers.Â
It is also worth pointing out that SDP has a Short Term PowerRating of 8, still in the “consider buying” zone from a short term perspective.
By contrast, ZN has slipped into a short term trading range — and its Short Term PowerRating similarly has slipped to a “neutral” of 6. The stock is not a good place for new money and any strength would be an opportunity to exit.
Going forward, our strategy as short term traders is to wait for the current profit-taking to resolve itself. If it continues, then the ranks of stocks trading above their 200-day moving averages will grow, creating new high Short Term PowerRatings opportunities in stocks. If the sell-off is short-lived, and markets begin to rally again, then we will once again look to the high Short Term PowerRating short ETFs where we have consistently found edges in overbought markets trading below the 200-day moving average.
Our highest Short Term PowerRatings stocks have outperformed the average stock by a margin of nearly 17 to 1 after five days. Click here to start your free, 7-day trial to our Short Term PowerRatings!