Tech-Heavy ETF Hits Short-Term Extreme - High Probability of Reverting to Mean?

It was just another day in the park for the bulls. The continued push since the gap became higher on Jan. 3 has managed to push the tech-heavy QQQQ into a short-term “very overbought” extreme with an RSI (2) at 98.4. As I always state, when an ETF typically reaches an extreme of this manner, the market fades over the short-term (1-3 days). A move that pushes QQQQ lower would likely close the gap at $54.62, which would mean a 3.5% loss for the QQQQ.

A move like this would certainly be advantageous for my current open positions in both the High-Probability and Mean-Reversion strategy. Yes, I took a position later in the afternoon in the tech-heavy index and so far I like the probability on this one. All of the short-term technical indicators that I follow are reading extremes, so I had no choice but to take a position.

Intel (INTC) comes out after the bell tomorrow and should be quite the catalyst for the QQQQ’s next move. I would love to say that the next move is definitely going to be bearish over the short-term, but as we all know in trading, even when M-R probability is leaning heavily towards your side, there are no guarantees.

Short-Term High-Probability, Mean-Reversion Indicator – as of close 1/11/10

Benchmark ETFs

S&P 500 (SPY) – 83.7 (very overbought)
Dow Jones (DIA) –75.3 (overbought)
Russell 2000 (IWM) – 69.3 (neutral)
NASDAQ 100 (QQQQ) – 90.2 (very overbought) / RSI (2) – 98.5

Sector ETFs

Biotech (IBB) – 76.8 (overbought)
Consumer Discretionary (XLY) – 57.0 (neutral)
Health Care (XLV) – 83.1 (very overbought)
Financial (XLF) – 74.1 (overbought)
Energy (XLE) – 79.8 (overbought)
Gold Miners (GDX) – 42.3 (neutral)
Industrial (XLI) – 90.9 (overbought) / RSI (2) – 98.7
Materials (XLB) – 81.9 (very overbought)
Real Estate (IYR) – 54.5 (neutral)
Retail (RTH) – 48.9 (neutral)
Semiconductor (SMH) – 88.6 (very overbought)
United States Oil Fund (USO) – 65.2 (neutral)
Utilities (XLU) – 64.6 (neutral)

International ETFs

Brazil (EWZ) – 69.8 (neutral)
China 25 (FXI) – 73.1 (overbought)
EAFE (EFA) – 73.5 (overbought)
South Korea (EWY) – 75.4 (overbought)