Short-Term, High-Probability Mean-Reversion Indicator: Several ETFs Hit Extreme Readings

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 |  Includes: DIA, EEM, EFA, EWY, EWZ, FXI, GDX, GLD, IBB, IWM, IYR, OIH, QLD, QQQ, RTH, SDS, SMH, SPY, SSO, TBT, TNA, TZA, USO, VXX, XLB, XLE, XLF, XLI, XLU, XLV, XLY
by: Andrew Crowder

Before I delve into Thursday’s market action I would like to mention the GDX trade from Wednesday. Last Friday I placed a trade in my High-Probability, Mean-Reversion strategy using GDX as the underlying. GDX had moved into a “very overbought” state and the RSI (2) had pushed above 99 with strong bearish seasonal conditions. As a result, I faded extreme reading with some GDX put in the options strategy and sold to open GDX in the ETF strategy. I closed out the trade Wednesday for a 12.3% profit in the options strategy and a 2.4% in the ETF strategy. Again, the High-Probability, Mean-Reversion strategy is broken up into two separate strategies, one using only ETF options and the other using only ETFs.

So, now that we have covered Wednesday’s trade, let us move on to Thursday’s price action.

The market continued to trade higher Thursday and pushed quite a few of the ETFs I follow in the High-Probability, Mean-Reversion strategy into extreme readings. Notably, XLF, SMH, TNA, and SSO. There are several other ETFs that have moved into an overbought state , but the RSI (2) readings are a bit lower than I would prefer. So, with that being said, I could be placing another trade today in the strategy.

Short-Term High-Probability, Mean-Reversion Indicator – as of close 12/09/10

Benchmark ETFs

* S&P 500 (NYSEARCA:SPY) – 79.7 (overbought) / RSI (2) – 97.0
* Dow Jones (NYSEARCA:DIA) –71.3 (neutral)
* Russell 2000 (NYSEARCA:IWM) – 84.4 (very overbought)

* NASDAQ 100 (QQQQ) – 74.6 (overbought) / RSI (2) – 95.6

Sector ETFs

* Biotech (NASDAQ:IBB) – 70.3 (overbought)
* Consumer Discretionary (NYSEARCA:XLY) – 72.3 (overbought)
* Health Care (NYSEARCA:XLV) – 58.7 (neutral)
* Financial (NYSEARCA:XLF) – 85.7 (very overbought) / RSI (2) – 98.7
* Energy (NYSEARCA:XLE) – 67.1 (neutral)
* Gold Miners (NYSEARCA:GDX) – 51.4 (neutral)
* Industrial (NYSEARCA:XLI) – 74.7 (overbought)
* Materials (NYSEARCA:XLB) – 66.8 (neutral)
* Real Estate (NYSEARCA:IYR) – 32.3 (neutral)
* Retail (NYSEARCA:RTH) – 77.5 (overbought)
* Semiconductor (NYSEARCA:SMH) – 84.4 (very overbought) / RSI (2) – 96.5
* United States Oil Fund (NYSEARCA:USO) – 64.6 (neutral)
* Utilities (NYSEARCA:XLU) – 46.4 (neutral)

International ETFs

* Brazil (NYSEARCA:EWZ) – 31.6 (neutral)
* China 25 (NYSEARCA:FXI) – 36.4 (neutral)
* EAFE (NYSEARCA:EFA) – 66.7 (neutral)
* South Korea (NYSEARCA:EWY) – 73.2 (overbought)

Commodity ETFs

* Gold (NYSEARCA:GLD) – 46.9 (neutral)

Ultra Extremes

* Small Cap Bear 3x (NYSEARCA:TZA) – 15.0 (very oversold) / RSI (2) – 2.6
* Small-Cap Bull 3x (NYSEARCA:TNA) – 86.2 (very overbought) – RSI (2) – 97.5
* UltraLong QQQQ (NYSEARCA:QLD) – 74.1 (very overbought)
* Ultra Long S&P 500 (NYSEARCA:SSO) – 79.4 (overbought) – RSI (2) – 96.8
* Ultra Short S&P 500 (NYSEARCA:SDS) – 20.3 (oversold)
* UltraShort 20+ Treasury (NYSEARCA:TBT) – 64.7 (neutral)

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in XLF, SMH over the next 72 hours.