Trading By the Numbers: Another Rally, Another Sell-Off in Europe

There’s a classic scene in the movie, Godfather III in which Al Pacino bemoans the fact that every time he tries to make the family legitimate, it seems as if something – or someone – is always there to ruin the plan. Or, more famously: “Every time I think I’m out, they pull me me back in!”

A similar feeling comes to mind whenever the topic of Europe comes up. As if in revenge for more than a decade of Euro-bashing, news from the continent monopolizes American headlines constantly. Every time a trader or investor begins thinking about the earnings of a Home Depot (HD) or the forecast of a Caterpillar (CAT), there is always a slight hesitation, an asterisk, a near constant qualification that goes something like: “that is, depending on what happens in Europe.”

But when a European exchange-traded fund shows up on the radar screen as having exceptionally negative edges, then even the most Euro-fatiged trader must take some notice. After all, for the data-driven investor, it’s the edge that counts. And if the edges are in Europe or, more accurately of late, against Europe, than that’s where the trader’s attention needs to be devoted.

As of Monday’s close, the Vanguard European ETF (VGK) had closed lower by well over 2%. The sell-off comes after a two-day rally in VGK – as well as in other European country fund ETFs – that took the fund to the edge over overbought territory below the 200-day moving average. This has been a pattern in the ETF for months: a short term rally taking the fund to or near overbought territory, and then a sharp sell-off that more often than not has taken the ETF to new short term lows.

This was the case after short term rallies in August, September and, potentially, again in November as the VGK begins to move back toward oversold territory.

For short term traders, there may be more lesson here than near-term trading opportunity. There will probably come a time when funds like VGK become overbought and remain overbought long enough to climb back into bull market territory. But for now, as long as the ETF continues to sell-off as soon as it becomes the least bit overbought, traders and active investors not looking to sell short those rallies are probably best served to remain on the sidelines.

The ETFs in today’s report were drawn from the data and research available through PowerRatings. To find out more, click here.

David Penn is Editor in Chief of TradingMarkets.com