As Larry Connors, founder and CEO of TradingMarkets put it in his Daily Battle Plan message to traders this morning, it is pretty hard to imagine traders and investors buying into the wildly
overbought markets of Wednesday and Thursday of last week. But it is such buying that can and does happen, creating the kind of extreme market conditions that provide opportunities for short term
traders who look to buy weakness and sell strength.
Some of the better opportunities for buying weakness and selling strength using PowerRatings came in the market for top-rated leveraged exchange-traded funds (ETFs) – especially inverse leveraged
ETFs. These funds had been moving lower – and earning Leveraged ETF PowerRatings upgrades – in the days leading up to the broad-based sell-off on Friday. Traders who scaled-in to them as their
PowerRatings were upgraded were then able to take profits as overbought conditions brought out massive selling, sending inverse leveraged ETFs higher.
Some examples include the rally in inverse leveraged ETFs like the ^FAZ^.
FAZ earned a top leveraged ETF PowerRatings upgrade to 10, our highest level, on July 13 at 13.74. By week’s end, the inverse leveraged fund, which tracks the inverse of the Russell 1000 Financial
Services index, was up by more than 15%.
Another example of 10-rated inverse leveraged funds rallying from mid-week weakness to end-of-week strength was the ^ERY^. closing on July 13 at 54.98, ERY climbed
to more than 59 by Friday.
Other examples of top-rated inverse leveraged ETFs rallying into strength include the bounce from 9-rated ^TZA^, as well as a number of inverse leveraged
ETFs that had earned and maintained top ratings for several days leading into the Friday sell-off. These funds include the ^QID^ and the ^SSG^ (below).
As I have written before, inverse leveraged ETFs can provide excellent opportunities for short term traders when markets go on extended, uni-directional runs. While pullbacks and bounces may
become more rare as markets become more and more overbought (or oversold, for that matter), the extreme levels that leveraged ETFs in general and inverse leveraged ETFs in specific can reach often
mark the best opportunities for traders.
By waiting for inverse leveraged funds to reach extreme levels, short term traders can put powerful, quantified edges behind every trade. If you are looking for ways to improve and enhance your
short term trading, why not click here to launch your free, one-week trial to our Ultimate PowerRatings: quantified analysis for stocks, ETFs and leveraged ETFs all in one number.
David Penn is Editor in Chief at TradingMarkets.com.