How overbought are the current markets? Larry Connors over the weekend did a study which revealed that the S&P 500 had closed in extreme overbought territory (above RSI(2) of 90) for five or more days 20 times since 1995.
More interestingly, Larry discovered that when you start to count consecutive days in extreme overbought territory beyond 5 or 6, the number of instances drops significantly.
What does this mean for traders in the second week of trading in March? In part it means what multiple consecutive overbought days always means: that a pullback is increasingly likely the more overbought we become.
^FAZ^. Leveraged ETF PowerRating of 9 (above)
For traders who are disciplined and patient, the game plan is clear: remain on the sidelines until profit-taking and, eventually, panic-selling, help drive markets from their current overbought conditions down into oversold levels.
For traders who are disciplined but perhaps a little less patient, I have been pointing to potential opportunities in the leveraged ETF market – opportunities made all the more easy to spot using our new Leveraged ETF PowerRatings.
^TYP^. Leveraged ETF PowerRating of 9 (above)
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Leveraged PowerRatings rate leveraged and inverse leveraged ETFs on a scale of 1 to 10. The lowest rated leveraged ETFs, those with Leveraged PowerRatings of 1 or 2, have made significant short term gains less than 25% of the time in our testing. This makes these funds, ETFs to avoid – or to consider selling short.
On the other hand, our highest rated Leveraged PowerRatings ETFs have made significant short term gains nearly 80% of the time. Those funds with the next higher ratings – Leveraged ETF PowerRatings of 8 and 9 – have made significant short term gains more than 75% of the time.
^ZSL^. Leveraged ETF PowerRating of 8 (above)
This is based on our quantitative backtesting of more than 100 widely-traded leveraged and inverse leveraged ETFs, involving thousands of simulated trades in these ETFs since inception.
For today, there are three leveraged ETFs (listed throughout the column) for high probability traders to keep an eye on over the next few days. While already earning top Leveraged ETF PowerRatings, further market strength could help these funds earn even higher ratings.
Find out more about what Leveraged ETF PowerRatings can do for you and your trading. Click here to launch your free, 7-day trial to our Leveraged ETF PowerRatings today.
David Penn is Editor in Chief at TradingMarkets.com.