These four prominent ETFs recently flashed a buy signal based on the Parabolic SAR -- an indicator used to help you get in and out of trades. The parabolic SAR puts dots above the price bars when the trend is down, and puts dots below the price bars when the trend is up. In these four ETFs the dots just moved from above the price to below the price, indicating the potential for more upside. The indicator is designed to keep you in the trade until a potential reversal is occurring; if the dots move back above the price bars of these ETFs it is time to get out of the long position. No indicator is perfect though so it's always good to take a look at the overall trend and price action of the ETF as well.

SEE: Identifying Market Trends

iShares MSCI Emerging Markets Index Fund (ARCA: EEM) has been in an overall downtrend since the start of the year, so this buy signal is going against the dominant trend. Since the end of June the ETF has been moving higher, so the SAR buy signal could be indicating the next wave higher in the correction (within the downtrend). The last buy signal at the start of August only lasted three days, so the ETF is fairly choppy at the moment. I prefer to wait for the ETF to break above the recent high at $40.24. If that occurs it gives the Parabolic SAR buy signal more credibility given the current conditions.



Market Vectors Gold Miners (ARCA: GDX) is in a similar position, as the price of the ETF has been under downward pressure over the long-term. Therefore, once again be wary of going against the trend. The ETF recently put in a higher-low (August low relative to June low), which is a positive sign though. Another favorable sign would be if the price breaks a recent high. If the price can push above $28.35 I think there is sufficient evidence to take a long trade. The trade is most likely to last only a few days to a couple of weeks since it is a counter-trend move.

CHART

SEE: Building An All-ETF Portfolio

Market Vectors Oil Services (ARCA: OIH) has been in an overall uptrend but has taken a breather (mostly sideways) since mid-July. On August 13 the Parabolic SAR moved below the price indicating the correction may be over. Once again though I still like a bit more confirmation than simply relying on the indicator. If the ETFs rallies above $46 it is likely to make another run to a new high. 



iShares MSCI Brazil Index Fund (ARCA: EWZ) fell hard in June, but has stabilized in July and August. Once again be wary of going against the dominant trend. There are some signs a reversal is underway though. The stock made a higher swing low in August relative to the July swing low. On August 12 the ETF also eclipsed the former swing high from July. So while this trade is against the dominant trend, I do see potential upside. Also, the parabolic SAR limits the downside to less than $2 (based on $44.42 August 13 closing levels) and if the rally does continues the reward could easily outweigh this risk



SEE: Market Reversals And How To Spot Them

The Bottom Line
The parabolic SAR provides buy and sell signals, but shouldn't be used in isolation; price movement should also confirm the signal. The nice thing about the indicator is that is also limits risk. As the dots follow along with the trend they act as a trailing stop; if the price moves below the dots in an uptrend they flip to the top of the price bars signaling to get out.

At the time of writing, Cory Mitchell did not own shares in any of the funds mentioned in this article.

Charts courtesy of StockCharts.com.

Related Articles
  1. Options & Futures

    Retracement Or Reversal: Know The Difference

    Learn to distinguish between a temporary price change and a long-term trend.
  2. Forex Education

    How To Build A Trading Indicator

    Wondering how people like Elliott and Gann built their famous trading tools? Learn the basics of constructing an indicator.
  3. Forex Education

    Spotting Trend Reversals With MACD

    Knowing when trends are about to reverse is tricky business, but the MACD can help.
  4. Charts & Patterns

    Market Reversals And How To Spot Them

    The sushi-roll indicator may help lower the risk of trying to pick market tops and bottoms.
  5. Options & Futures

    Trading Psychology: Consensus Indicators - Part 2

    Professional market players are some of the best models for the individual small trader to mimic.
  6. Active Trading Fundamentals

    Leading Indicators Of Behavioral Finance

    Discover how put-call ratios and moving averages can be used to analyze investor behavior.
  7. Active Trading Fundamentals

    Support And Resistance Reversals

    Discover how these influential levels can switch roles.
  8. Trading Strategies

    How To Buy Penny Stocks (While Avoiding Scammers)

    Penny stocks are risky business. If want to trade in them, here's how to preserve your trading capital and even score the occasional winner.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Total World Stock

    Learn about the Vanguard Total World Stock exchange-traded fund, which invests in stocks located in numerous countries with a high level of diversification.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  3. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  4. Indicator

    Indicators are statistics used to measure current conditions ...
  5. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  2. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  3. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  4. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  5. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
  6. Is there a situation in which wash trading is legal?

    Wash trading, the intentional practice of manipulating a stock's activity level to deceive other investors, is not a legal ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!