Up for the Downstroke? ETF PowerRatings And the Short Side of Trading

When markets are increasingly overbought, there are two strategies that high probability traders can pursue.

The first is in leveraged ETFs, particularly inverse leveraged ETFs. For example, while semiconductor exchange-traded funds like the ^SMH^ are becoming increasingly overbought above the 200-day moving average, edges are developing in inverse leveraged exchange-traded funds like the ^SSG^.

Trading leveraged ETFs is generally a business for experienced, veteran traders (if you are interested in gaining this experience, then call us at 1-888-484-8220 extension 1 and we will e-mail your information about Larry Connors’ upcoming course on how to trade leveraged ETFs). But there are other opportunities for short term traders in ETF markets like the one we have right now: selling overbought ETFs short.

In today’s report, I want to highlight three exchange-traded funds (ETFs) that have earned exceptionally low ETF PowerRatings. While ETFs that have earned ETF PowerRatings of 8 or higher are referred to as “consider buying” ETFs, those funds that have ETF PowerRatings of 3 or lower are best thought of as “consider avoiding.”

Or selling short.

Why? Our research into short term price behavior in exchange-traded funds going back to 2003 shows that ETFs that earned ETF PowerRatings of 3 or 2 made significant short term gains less than 25% of the time. Those ETFs that earned PowerRatings of 1 only made significant gains 20% of the time.

So if you are looking for ETFs to buy for short term trades to the long side, ETFs with PowerRatings of 3, 2 or 1 are, based on our testing, funds to avoid. Or consider selling short.

All three of the ETFs in today’s report have ETF PowerRatings of 3 or less and are trading below their 200-day moving averages – a requirement for selling short non-leveraged exchange-traded funds. For traders who are having a hard time sitting on their hands as overbought markets become even more overbought, betting against low ETF PowerRatings funds can be a kind of solution.

FXI Chart

The ^FXI^ (above) has an ETF PowerRating of 3 going into Thursday’s trading. The ETFs has closed in overbought territory below the 200-day moving average for two days in a row.

Closing in overbought territory below the 200-day moving average for five days in a row is the very overbought ^IAI^ (below). IAI has an ETF PowerRating of 2.

IAI Chart

The last ETF in today’s report is the one with our absolutely lowest possible ETF PowerRating: the ^PBW^ (below). With an ETF PowerRating of 1, the PBW has closed higher below the 200-day for five consecutive trading days – the last four in overbought territory.

PBW Chart

Find out more about what ETF PowerRatings can do for you and your trading. Click here to launch your free, 7-day trial to our ETF PowerRatings today.

David Penn is Editor in Chief at TradingMarkets.com.