PowerRatings, Overbought Stocks and the Bond ETF Bounce
Stocks edged higher on Tuesday in advance of the FOMC policy announcement scheduled for early Wednesday afternoon.
From our perspective as short term stock and ETF traders who use Short Term PowerRatings to help guide us from opportunity to opportunity, there are two significant take-aways from Tuesday’s trading session.
The first is that the bounce in bond ETFs we had been anticipating for the past few days arrived on Tuesday, with bond ETFs like the TLT, AGG, and LQD all moving dramatically higher and closing above their 5-day moving averages.
ETF traders who took advantage of the opportunities in bond ETFs when they were oversold should be increasingly wary of holding those positions as those ETFs become increasingly overbought. Remember, as short term traders, overstaying our welcome in a position that has performed as desired is as close to a cardinal sin as anything else in short term trading. Lock in gains and look for the next trade.
Speaking of which, the second thing that we saw from Tuesday’s trading action is a market that has become overbought in the short term. As you know, I have suggested that there were one of two outcomes that short term stock and ETF traders using PowerRatings should be aware of and the latter of those two possibilities — further advances in stocks leading to overbought conditions and potential opportunities in short or inverse ETFs — appears to be the one that is materializing.
So where should ETF traders start looking for even further pullbacks and PowerRatings upgrades? Right now there are a few short/inverse ETFs with Short Term PowerRatings of 7 and low, 2-period RSIs that traders might want to keep an eye on over the next few days. Keep an eye out for PowerRatings upgrades in these currently oversold ETFs.
PowerShares UltraShort QQQQ ETF, QID
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QID |
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PowerRating) Short Term PowerRating 7. RSI(2): 16.42
PowerShares UltraShort Technology ETF, REW
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REW |
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PowerRating) Short Term PowerRating 7. RSI(2): 13.07
PowerShares UltraShort Russell 2000 ETF, TWM
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TWM |
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PowerRating) Short Term PowerRating 7. RSI(2): 19.88
When profit-taking comes to these overbought markets — as it inevitably will — the opportunities to the downside could be significant.
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