My Bread and and Butter Trade
The major market indices gapped higher yesterday and several ETFs that I follow are nearing overbought territory. Check out the huge upside gap in the SPY chart below.
As a result, I am beginning to look for opportunities to fade the ETFs I follow that have reached an overbought state.
Every trader has their own approach. There is no holy grail. It is your responsibility as a trader to find a few trading strategies that fit into your lifestyle and stick with them for long haul. But, make sure you diversify your strategies.
My bread and butter strategy - I use short-term extremes to fade the market.
As famed options trader Tom Sosnoff states, "the trend is your friend, but the fade is the ultimate wealth builder." My trading style lives by this statement and over the course of my options trading career, it has served me well.
I make the assumption that a stock or ETF will advance or decline over the short-term after a short-term extreme is reached.
- If the market is extremely overbought, I make the assumption the market will move lower over the short-term (1-5 days).
- If the market is extremely oversold, I make the assumption the market will move higher over the short-term (1-5 days).
So what ETFs are currently in a short-term overbought state?
One example: the iShares MSCI Brazil index Fund (EWZ) is one such ETF that has moved onto my radar. I love to see a gap up into short-term overbought territory. The RSI (2) is currently over 93, so it is not quite where I want it. This is where patience is imperative. I can't emphasize the importance of patience for long-term success because opportunities are made up easier than losses. Wait for the trade to come to you and then pounce. In EWZ's case I want to wait until the RSI (2) moves above 95, preferably 97.5, before a take a position that fades the current short-term trend.
Remember, when using the RSI (2) or any short-term measure, you have to be nimble. The trade could last a few minutes, hours, or even a several days, but you must be attentive to the trade.
As always, feel free to email me at optionsadvantage@wyattresearch.com with any questions.
Andy Crowder
Editor and Chief Options Strategist
Options Advantage
