High Probability ETF Trading Report: High Flying Financial ETFs - XLF, UYG, KRE

Brokerage stocks were lower overnight in Asia. Will this lead to selling of financial-related stocks and ETFs in the United States?

Among the ETFs in our database of the most liquid and highly traded ETFs in the marketplace, the most overbought right now are by far the financials. Recent strength in this sector has pushed a number of financial ETFs up into overbought territory below the 200-day moving average. Continued strength â€" while remaining below the 200-day â€" may represent an opportunity for short term traders to wager against the recent strength in financial shares.

High probability ETF traders taking a look at the potential for reversal in financial ETFs have a number of options to choose from â€" from leveraged ETFs that are challenging their 200-day moving averages to non-leveraged ETFs for which the 200-day remains a distant memory.

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First let's take a look at one of the most widely traded financial ETFs, the Financial Select Sector SPDR ETF ( XLF | Quote | Chart | News | PowerRating). The XLF includes many of the biggest financial stocks in the sector such as JP Morgan Chase ( JPM | Quote | Chart | News | PowerRating) and Wells Fargo ( WFC | Quote | Chart | News | PowerRating).

XLF has been in a very short term uptrend, moving higher for the past four days at it nears its 200-day moving average. This advance is what has helped boost XLF's 2-period RSI from less than 40 to more than 80 in less than a week's time.

Among leveraged opportunities for short term traders, the overbought status of the ProShares Ultra Financials ETF ( UYG | Quote | Chart | News | PowerRating) should be worth paying attention to.

Unlike the XLF, the leveraged UYG is still quite some distance from its 200-day moving average. Recently closing at just under $4 with its 200-day near $6, the fact that UYG is already in overbought extreme territory is noteworthy. UYG, like XLF, has been moving higher over the past few days with a 2-period RSI of more than 70 on Thursday and more than 80 on Friday.

Representing specifically regional banks, the KBW Regional Bank SPDR ETF ( KRE | Quote | Chart | News | PowerRating) remains a much-loathed ETF, trading nearly six points below its 200-day moving average. This may make the ETF's current rally all the more suspect insofar as it will take a considerable and sustained amount of buying to push KRE anywhere near â€" let alone above - its 200-day moving average.

Recall that ETFs near their 200-day moving averages (within 1.5% above or below) have a tendency to be more volatile than other ETFs. As such, high probability traders may want to focus on those ETFs that are either still significantly below (or significantly above) their 200-day moving averages.

According to a recent report, eight out of ten securities traded are exchange-traded funds. Want to learn how to trade them? Click here to order High Probability ETF Trading,the first quantified book of trading strategies to improve your ETF trading.

David Penn is Editor in Chief at TradingMarkets.com.