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USO had moved into an extreme short-term oversold state; as a result, I placed a trade in the High-Probability, Mean-Reversion strategy.

I was able to get out of the trade towards the end of the day for a gain of 7.9%. So far the strategy is up 6.5% for the month and 22.5% since its inception roughly three months ago. The strategy is averaging a monthly gain of 6.6%. This is right on track with my expectations of 5.0% a month. Moreover, the Sharpe ratio is 3 with a max drawdown of only 8.6%.

To say I am happy with the performance of the newsletters strategy would be an understatement.

By the way, did you see what GDX did? The ETF was in a short-term “very oversold” extreme with an RSI (2) of 4.4 and bounced today $1.98 or 3.73%. Buying slightly in-the-money calls -- 53 strike to be exact -- towards the end of the day would have reaped a nice $1.20 on a $4.40 option or 30%. I hope some of you were able to take advantage of the short-term “very oversold” reading in GLD.

As for the current state of the market ... well, I would expect to see a short-term reprieve in the lower-beta DIA and SPY over the short-term (1-3 days). While DIA looks nice because of the extreme overbought nature (87.9) of the ETF, I am more interested in IYR because it is the only ETF that currently has an RSI (2) reading above 5.

If both open up higher tomorrow there could be another trade in the newsletter’s flagship High-Probability, Mean-Reversion strategy. As always, stay tuned!

Short-Term High-Probability, Mean-Reversion Indicator – as of close 1/25/10

Benchmark ETFs

  • S&P 500 (NYSEARCA:SPY) – 74.7 (overbought)
  • Dow Jones (NYSEARCA:DIA) 87.9 (very overbought)
  • Russell 2000 (NYSEARCA:IWM) – 60.0 (neutral)
  • NASDAQ 100 (QQQQ) – 64.8 (neutral)

Sector ETFs

  • Biotech (NASDAQ:IBB) – 64.9 (neutral)
  • Consumer Discretionary (NYSEARCA:XLY) – 68.9 (neutral)
  • Health Care (NYSEARCA:XLV) – 45.9 (neutral)
  • Financial (NYSEARCA:XLF) – 48.7 (neutral)
  • Energy (NYSEARCA:XLE) – 77.5 (overbought)
  • Gold Miners (NYSEARCA:GDX) – 52.4 (neutral)
  • Industrial (NYSEARCA:XLI) – 76.0 (overbought)
  • Materials (NYSEARCA:XLB) – 66.5 (neutral)
  • Real Estate (NYSEARCA:IYR) – 78.6 (overbought) / RSI (2) – 95.2
  • Retail (NYSEARCA:RTH) – 71.2 (overbought)
  • Semiconductor (NYSEARCA:SMH) – 66.9 (neutral)
  • United States Oil Fund (NYSEARCA:USO) – 51.3 (neutral)
  • Utilities (NYSEARCA:XLU) – 57.4 (neutral)

International ETFs

  • Brazil (NYSEARCA:EWZ) – 36.8 (neutral)
  • China 25 (NYSEARCA:FXI) – 35.1 (neutral)
  • EAFE (NYSEARCA:EFA) – 72.5 (overbought)
  • South Korea (NYSEARCA:EWY) – 63.5 (neutral)

Commodity ETFs

  • Gold (NYSEARCA:GLD) – 39.5 (neutral)

Ultra Extremes

  • Small Cap Bear 3x (NYSEARCA:TZA) – 38.1 (neutral)
  • Small-Cap Bull 3x (NYSEARCA:TNA) – 58.9 (neutral)
  • UltraLong QQQQ (NYSEARCA:QLD) – 64.8 (neutral)
  • Ultra Long S&P 500 (NYSEARCA:SSO) – 73.9 (neutral)
  • Ultra Short S&P 500 (NYSEARCA:SDS) – 32.4 (neutral)
  • UltraShort 20+ Treasury (NYSEARCA:TBT) – 58.6 (neutral)
Source: USO Trade Success, Strategy Up 22.5%