The biggest edges in exchange-traded funds over the next few days are likely to be found in funds that have become short-term overbought below the 200-day moving average. The funds in today's column are all trading below their 200-day moving averages and have rallied toward levels from which they have historically reversed and headed lower short-term.
Recent strength has put a number of country funds in overbought territory below the 200-day. This includes country-based ETFs like the iShares MSCI Spain Index Fund (EWP | PowerRating ) and the iShares MSCI France Index Fund (EWQ | PowerRating ) .
Shares of EWP have closed higher for three days in a row, and finished trading on Monday up by more than 3%. Monday's close marks the fund's second consecutive close in overbought territory below the 200-day.
EWQ heads into trading on Tuesday after a Monday gain of nearly 3%. Like EWP, EWQ has closed in overbought territory below the 200-day for two days in a row.
Whenever possible, we like to present edges in country funds first, before sector funds or commodity funds. This is because the statistical research suggests that country funds (including U.S. "country funds" like the SPDR S&P 500 ETF (SPY | PowerRating ) ) do a better job of rallying after pullbacks, and of selling-off after climbing into overbought territory.
Read more about this research in the book by Larry Connors and Cesar Alvarez, High Probability ETF Trading: 7 Professional Strategies to Improve Your ETF Trading .
At the opposite end of the spectrum are commodity and currency-based ETFs. The research here suggests that these funds are likely to "run", entering and remaining in trends for extended periods. This tends to make commodity and currency-based ETFs less suitable for short term swing trading.
As for the sectors with the biggest edges, funds representing markets in basic materials, health care and consumer discretionary alike have all rallied toward levels from which they have tended to underperform. These ETFs include the Materials Select Sector SPDR Fund (XLB | PowerRating ) , the Health Care Select Sector SPDR Fund (XLV | PowerRating ) , and the Consumer Discretionary Select Sector SPDR Fund (XLY | PowerRating ) .
All three of these sector funds are equally overbought below the 200-day moving average, having closed higher for three days in a row and finished in overbought territory for two consecutive sessions ahead of trading on Tuesday.
Want to learn how to swing trade exchange-traded funds? Join Larry Connors for a free introduction to the Fall Semester of the Swing Trading College . Click the link below to learn more.
David Penn is Editor in Chief of TradingMarkets
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.