PowerRatings ETF Strategies for Overbought Markets
For the most part, stocks were up modestly on Wednesday, with gains in financials and technology shares matched by pullbacks in health care stocks.
Our focus however, in terms of trading strategy for the near term, is based far more on Tuesday’s trading than on Wednesday’s. It was Tuesday’s bullish session that boosted stocks high enough for a number of sector and index exchange-traded funds to earn Short Term PowerRatings upgrades to 8. This is a level at which we begin to become interested in these ETFs — all short or inverse ETFs — as potential trades to take advantage of the selling that inevitably follows overbought extremes.
Below are five inverse exchange-traded funds, all with Short Term PowerRatings of 8, that have become overbought as stocks in general have moved higher. Again, our strategy for trading is the same: we look to buy high Short Term PowerRatings ETFs and stocks as they pull back toward their 200-day moving average.Â
It is in the environment of our bear market that means that those ETFs that tend to be above their 200-day moving averages are short ETFs. But this does not change our core strategy: when strong ETFs — or stocks — that are trading above their 200-day moving averages pull back, we become potentially interested as buyers.
ProShares UltraShort QQQ ETF
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PowerRating) Short Term PowerRating 8. RSI(2): 14.96
Rydex Inverse 2X Russell 2000 ETF
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PowerRating) Short Term PowerRating 8. RSI(2): 18.59
ProShares UltraShort Consumer Services ETF
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PowerRating) Short Term PowerRating 8. RSI(2): 17.75
Remember that our preferred approach to buying any market is to do so on either intraday weakness (i.e., trading below the previous close) or simply on a follow-through lower close. The lower we are able to take a position — above the 200-day moving average — the greater the potential edge as demand returns and prices are bid higher once again.
Does your stock trading need a tune-up? Our highest Short Term PowerRatings stocks have outperformed the average stock by a margin of nearly 17 to 1 after five days.
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Whether you have a trading strategy of your own that could use a boost or are looking for a way to tell the stocks that will move higher in the short term from the stocks that are more likely to disappoint, our Short Term PowerRatings are based on more than a decade of quantified, backtested simulated stock trades involving millions of stocks between 1995 and 2007. Click the link above or call us at 888-484-8220, extension 1, and start your free trial today.