Up Days, Down Days: 3 ETFs for Traders

February 28, 2008
David Penn

We don’t spend nearly enough time highlighting some of the opportunities in exchange-traded funds for short-term traders. While there are fewer ETFs than stocks, hardly a day passes when an exchange-traded fund does not appear on one of the lists we compile regularly for our TradingMarkets
Stock Indicators listing.

Today is no different. And to make amends, let’s take a look at what exchange-traded funds are popping up in our Indicator screens. A cursory review suggests that we have opportunities to both the upside and downside for short-term traders looking to trade exchange-traded funds.

I decided to look at Consecutive Up and Down days to see what sorts of exchange-traded opportunities in the short-term might be found there. As I like to say, traders are never more bullish than when stocks are up day after day, and they are never more bearish than when stocks are down day after day. The only problem is that this psychology is exactly backwards from the kind of attitude a trader should have toward consecutive up days and consecutive down days.

As we documented in research here at TradingMarkets, as well as in Larry Connors’ book How Markets Really Work, markets are inclined to underperform the more consecutive up days they experience, just as markets tend to outperform after several down days in a row.
While this can be difficult for some traders to abide by psychologically, our research–in addition to being quantified–also passes a certain common sense test.

Think about it: the market moves up for one day, which makes some people decide to buy in. Then the market moves up on the next day, which encourages even more people to start buying. Each day the market moves higher, more and more people decide that they want to get in on a good thing and join the rally, bidding the market still higher.

Sooner or later, though, everyone who is interested in buying has bought. And many of those who were among the first to buy are starting to think about taking profits–profits delivered to them by those “late adopters” to the rally, who bought after the market had begun moving higher.

The same thing is true with markets that are making consecutive down days. After a period of time, there is simply no one left to sell–and plenty of people who are thinking about buying in order to cover their positions.

We have found this phenomenon to be especially acute in the short-term. It is a very real edge that short-term traders can exploit, either systematically or on a discretionary basis.

Click here
to read our research into trading consecutive up days and consecutive down days.

Looking through the lists of both five or more consecutive up days
(bearish) and five or more consecutive down days (bullish), I found two exchange-traded funds with low PowerRatings that had been achieved five or more consecutive up days, and one high PowerRating ETF that had experienced five or more consecutive down days.

What’s more, both overbought, “consecutive up days” stocks have 2-period Relative Strength Index values of more than 98. And, likewise, the sole oversold, “consecutive down days” stock has a 2-period RSI of less than 2. These extreme RSI values alone, even without the consecutive days factor included, would be enough to make these exchange-traded funds vulnerable to reversal. Combined, the warning of potential reversal is all the more emphatic

UltraShort Technology ProShares
(
REW |
Quote |
Chart |
News |
PowerRating).
PowerRating 8. RSI(2) 1.92