How do you know when the ETF market is overbought - maybe extremely so?
How about when you only have three exchange-traded funds (ETFs) with ETF PowerRatings of 8 or higher?
Going into trading on Tuesday, the ETF markets are as overbought as they have been for awhile. Of all the exchange-traded funds in our database, there are only three that have earned the sort of ETF PowerRatings upgrades that make them potentially attractive candidates for high probability, short term trades.
Click here to learn more about trading exchange-traded funds using ETF PowerRatings.
Before taking a look at these three ETFs, let's stop for a moment to understand what the current market is telling us as high probability traders.
High probability trading in general - and ETF PowerRating trading in specific - is about buying ETF markets after they have pulled back and become oversold. Unless we are looking to sell markets short - and with the S&P 500, Dow and Nasdaq all above their 200-day moving averages, we are focused exclusively on the long side of the market - then the only interest we have in overbought markets is in knowing that the more overbought the current market becomes, the sooner a pullback is likely to arrive.
So while we want to be vigilant for those few high ETF PowerRatings funds that have high ETF PowerRatings of 8 or more, we also want to be patient enough to understand that a pullback is increasingly likely and even better high ETF PowerRatings opportunities may be only a few days away.
For now, though, here are three funds that will either be among the last to rally in the face of continued market strength or will be among those to help lead the market lower during the next significant pullback.
At the top of this admittedly short list is the iShares MSCI Austria Investable Market Index Fund ETF ( EWO | Quote | Chart | News | PowerRating) (above). This ETF has closed lower for the past five trading days in a row, which has helped the fund earn its high ETF PowerRating despite actually moving higher on Monday. With a 2-period RSI just outside of overbought territory, EWO has an ETF PowerRating of 9.
One of the more popular and widely-traded exchange-traded funds is also on today's list: the iShares FTSE/Xinhua China 25 Index Fund ETF ( FXI | Quote | Chart | News | PowerRating) (below).
With an ETF PowerRating of 8, FXI has also begun to move higher in recent days - though not so much to earn a downgrade to its ETF PowerRating. As of the close on Monday, FXI had a 2-period RSI of less than 70.
Lastly, is an exchange-traded fund that tracks international real estate.
The Dow Jones Wilshire International Real Estate SPDRS ETF ( RWX | Quote | Chart | News | PowerRating) (above) earned an ETF PowerRating of 8 on Monday, and has been relatively rangebound for the past few days. This sideways motion has allowed the fund to relieve some of the oversold conditions that characterized the fund earlier in the month. As with EWO and FXI, RWX has a neutral 2-period RSI of approximately 65.
David Penn is Editor in Chief at TradingMarkets.com.
