As I mentioned recently in one of the Trading Lessons of the Day, we never know on an intraday basis if the move is going to reverse or continue higher. The example I mentioned in that lesson proceeded to move 5% higher after the first 40 minutes of trading and exiting too soon left those additional profits on the table.
We've tested dozens and dozens of combinations looking to find the optimal exits and what we've found with ETFs, especially trading the TPS strategy, is that the best time to exit is at the close.
The market was very overbought coming into the day with many equity ETFs in overbought territory. Somewhere in the middle of the day, the bell went off that long term interest rates were significantly rising. I'm not sure why this all of a sudden became a reality (rates have been rising for weeks…look at iShares Barclays 20+Yr Treasury Bond Fund (TLT) which is the ETF for bond prices. It's been plunging, meaning long rates are beginning to soar). Just about every overbought and oversold ETF ends the same...they eventually reverse! The only thing that changes in each trade is the story why they reverse. As we've seen throughout this year in the Model Portfolio of the Daily Battle Plan, and as you've seen in our research and our most recent two books, one of the best ways to trade is to focus on ETFs, wait for specific times that they become overbought and oversold, scale-in to the positions and then exit them when they reverse. It's the best way I know to become a successful high probability trader.
Another note: Over the past three weeks I've been talking about what often happens when the market nears the 200-day moving average. You're now seeing it play itself out with this sideways whipsaw movement churning many investors and traders. We'll stay patient and wait until the market begins its move away from the 200-day. Eventually it will break out one way or another as it always has.
Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.
