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.
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.