With the S&P 500 overbought and the Nasdaq 100 oversold as the trading week begins, high probability traders may have a reprieve from the “all one market” tendency that has characterized many markets coming up off the spring 2009 lows.
Now, for example, we see exchange-traded funds like the ^QQQQ^ closing in oversold territory for two days in a row leading into Monday’s trading, while the ^SPY^ has climbed back into overbought territory above the 200-day moving average.
This means that opportunities for high probability traders to buy oversold markets on weakness and to sell overbought markets on strength may be more numerous than they have been for some time.
Here are some of the exchange-traded funds that high probability traders will be keeping an eye on over the next few days. These funds are divided into those that are oversold and at levels from which they have historically advanced, and those exchange-traded funds that are overbought and at levels from which they have historically reversed and moved lower.
Top of the list in terms of some of the most important exchange-traded funds trading in oversold territory include those ETFs that are linked to the Nasdaq 100. This includes the PowerShares QQQ Trust ETF or QQQQ noted above, as well as its leveraged cousin, the ^QLD^.
The QLD has closed lower for three days in a row going into Monday’s trading and is on course for a fourth consecutive lower close midway through the trading day. The past two closes in the QLD have both been in oversold territory above the 200-day.
Although not quite as oversold as the QQQQ and the QLD, the ^XLK^ are also under the sway of sellers.
The XLK closed in oversold territory above the 200-day on Thursday, bounced on Friday and are back in oversold territory as trading begins on Monday. A lower close in the XLK today on Monday could represent the fund’s third lower close out of the past four.
As far as country funds go, the one for high probability traders to watch may be the ^EWG^. EWG gapped lower on the open on Monday, dropping the ETF into oversold territory on an intraday basis.
EWG actually closed overbought on Friday, and Monday’s selling appears to represent a profit-taking opportunity for those traders who only recently had been bidding shares of the EWG higher. Should the EWG continue to retreat, high probability traders will have the opportunity to begin scaling in to the fund at potentially significantly lower levels.
For traders looking to take advantage of ETFs that may have moved too far too fast to the upside, there are a few overbought ETFs trading below their 200-day moving averages that have reached levels from which, historically speaking, they have reversed and moved lower.
These overbought exchange-traded funds include mostly oil-related ETFs like the ^USO^ and the ^OIL^ (below).
Both OIL and USO haves closed in overbought territory below the 200-day moving average for three days in a row ahead of Monday’s trading.
Also becoming increasingly overbought below the 200-day are a growing number of financial funds. These include ETFs like the ^KBE^ and the ^XLF^ (below).
Remember that inverse and inverse leveraged ETFs make it possible for traders in restricted accounts like IRAs and 401(k)s to take advantage of overbought conditions. For example, traders can buy inverse leveraged ETFs like the ^FAZ^ rather than selling short. Be sure to reduce your trading size correspondingly when trading leveraged ETFs – especially 3x funds – to avoid taking on more market exposure than is wanted.
How and when do I buy or sell an ETF? How and when should I add to an existing ETF position? How do I know when get out? If answers to these and other essential questions about trading exchange-traded funds are all that stand between you and success as an ETF trader, then click on the link below and find out how you can enroll in Larry Connors’ special High Probability ETF Trading Seminar – a one-day event available only through TradingMarkets.
The High Probability ETF Trading Seminar for the fall of 2010 will be held on Saturday, October 30 and spaces are limited. To find out more about the seminar – and to reserve your spot in the upcoming class – click here now.
David Penn is Editor in Chief at TradingMarkets.com.