Short-Term, High Probability Mean Reversion Indicator: The EFA Trade

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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

On Monday I placed a trade in the High-Probability, Mean-Reversion strategy. It was the first trade in several weeks.

The following day the catastrophe in Japan took another turn for the worse and the trade I had placed moved substantially lower.

Over the past few days, volatility has reigned supreme as the ETF has vacillated in a wide range only to move back down near the lows of the trade at the close Wednesday.

However, now we have a very interesting set-up as the market has moved into one of the most oversold states in quite some time. EFA has a RSI (2) of 0.2. Yes, 0.2.

EFA has managed to bounce off its 200-day moving average over the past two trading sessions. Couple this with the ETF wallowing in a short-term extreme “very oversold” state, and I think we could see a nice bounce over the next few sessions.

If the market opens lower or flat at the open I will be placing another trade in the portfolio, not in EFA, but in another ETF that I am keeping close tabs on.

Short-Term High-Probability, Mean-Reversion Indicator – as of close 3/16/11

Benchmark ETFs

* S&P 500 (NYSEARCA:SPY) – 17.9 (very oversold)
* Dow Jones (NYSEARCA:DIA) 17.3 very (oversold)
*Russell 2000 (NYSEARCA:IWM) – 22.1 (oversold)
* NASDAQ 100 (QQQQ) – 14.5 (very oversold)

Sector ETFs

*Biotech (NASDAQ:IBB) – 25.5 (oversold)
* Consumer Discretionary (NYSEARCA:XLY) – 17.3 (very oversold)
* Health Care (NYSEARCA:XLV) – 17.3 (very oversold)
* Financial (NYSEARCA:XLF) – 21.4 (oversold)
* Energy (NYSEARCA:XLE) – 27.7 (oversold)
* Gold Miners (NYSEARCA:GDX) – 19.3 (very oversold)
* Industrial (NYSEARCA:XLI) – 24.2 (oversold)
* Materials (NYSEARCA:XLB) – 25.5 (oversold)
*Real Estate (NYSEARCA:IYR) – 27.2 (oversold)
* Retail (NYSEARCA:RTH) – 21.3 (oversold)
* Semiconductor (NYSEARCA:SMH) – 13.9 (very oversold)
* United States Oil Fund (NYSEARCA:USO) – 32.7 (neutral)
* Utilities (NYSEARCA:XLU) – 19.4 (very oversold)

International ETFs

* Brazil (NYSEARCA:EWZ) – 28.3 (oversold)
* China 25 (NYSEARCA:FXI) – 23.2 (oversold)
* EAFE (NYSEARCA:EFA) – 6.5 (very oversold)
* South Korea (NYSEARCA:EWY) – 27.9 (oversold)

Commodity ETFs

* Gold (NYSEARCA:GLD) – 29.6 (oversold)

Ultra Extremes

* Small Cap Bear 3x (NYSEARCA:TZA) – 77.7 (overbought)
* Small-Cap Bull 3x (NYSEARCA:TNA) – 21.7 (oversold)
*UltraLong QQQQ (NYSEARCA:QLD) – 14.2 (very oversold)
* Ultra Long S&P 500 (NYSEARCA:SSO) – 17.8 (very oversold)
* Ultra Short S&P 500 (NYSEARCA:SDS) – 82.1 (very overbought)
* UltraShort 20+ Treasury (NYSEARCA:TBT) – 19.9 (very oversold)

Disclosure: I am long EFA.