ETF trading has become a regular subject here. The last trade day was two weeks ago. EWG was then ranked highest. What has happened to this ETF since then?

EWG has had a slight loss (-0.44%) since then.

Recall, concern was expressed as of the trade day about this ETF. The fact that President Trump was attacking trading partners for unfair trade was one reason. Another was his claims that allies were going to pay their “fair share” if NATO were to continue. Finally the uncertainties associated with European terrorism and the strains it and other considerations were putting on the continuation of the European Union (EU) were additional negatives.

Let’s look at EWG in terms of its current condition. This look will use the following:

1. ETF Trading Rankings
2. Technical Analysis

ETF Trading Rankings

Negative outcomes occur about 40% of the time for top-ranked ETFs based on ten years of backtesting. The EWG loss, thus far, is insignificant.

Its drop in the rankings is concerning. Below are updated rankings (non-trade day) for the current top 10 ETFs and where they ranked over the last eight weeks. EWG has fallen to 7th in just two weeks. That drop could be cause for concern. Rarely do high rankings drop so quickly.

ETF Trading Rankings

Is this cause for action? Not necessarily. Ten years of backtesting was done with no early exits. Overall, the results greatly exceeded a passive buy and hold strategy. However, no tests were performed to ascertain what happened when number one ranks dropped so quickly.

While the trade has been disappointing, the results thus far are benign. Indeed the movement suggests a trade that seems comatose. That is, nothing much is happening and it seems to be taking place in slow motion.

Technical Analysis (TA)

Technical analysis (TA) is a set of tools that may be used to assess entry/exit conditions. A new chapter (Chapter 12) incorporating a first attempt toward combining TA with the ETF Rankings System was recently added to the trading manual. The approach shown below differs from that. Eventually a standard approach to combining these two ways to evaluate ETFs will develop. For those interested in TA, the following section and the new chapter are recommended.

EWG is looked at in the following chart using some typical technical indicators:

EWG Chart

The five panels in the chart are explained below:

Moving Averages

Three moving averages (MA) are shown in the price panel. Price has dropped below the shortest MA although that is not necessarily reason to close a trade. The moving averages are still in bullish alignment (short above intermediate above long) with each other.

Stochastics

Stochastics is shown below the price panel. It is a sensitive oscillator and reacts quicker than the moving averages. Oscillators are especially good for non-trending securities and less useful for trending securities. This stochastic has just crossed from above to below its signal line, typically interpreted as a sign of a downturn.

SSSMO

SSSMO is a proprietary oscillator that is longer-term oriented than the Stochastics. Hence it is slower to react. It is positive (above the zero line), although it has been declining for the last three weeks. That suggests a downturn in price may be coming.

Bollinger Bands

Bollinger bands measure the standard deviation of price. Two sets of Bollinger Bands are used in the chart. Both measure the width of Bollinger Bands using moving averages for 20 and 8 week periods. The width of Bollinger bands does not predict the direction of price. Narrow bands represent less volatility. Many traders believe narrow bands precede a price break-out, although do not predict the direction of the move.

When the shorter moving average exceeds the longer one, price volatility is expanding. This relationship may be a sign of strength of movement. Whether that strength is up or down is determined by other indicators.

Volume

Volume, like Bollinger Bands, can be used to assess strength of movement. The indicators in the final panel are moving averages of Volume. The short-term is eight weeks and the long-term is 20 weeks. If the shorter is above the longer, then volume is increasing. Volume is seen to be the fuel for movement. When volume is increasing, it is generally accompanied by greater price movement.

A reasonable case could be made from the above indicators that EWG is neither a buy or a sell. The indicators look like they may be rolling over (moving toward a sell) and strength (measured via Bollinger Bands and/or Volume) seems to be weakening. If the indicators are turning over, better that strength be decreasing which presumably limits the strength of the move.

Conclusion

EWG ranked highest on the last trade day. It no longer does. The technical indicators show weakening since then as well. Neither the ranking or the indicators would signal buy today.

The ETF trading system was not created for intra-month trading, although users are free to do whatever they wish with the rankings. (Do so at your own risk!) For backtesting purposes, EWG will be held until the next trade day. Nervous holders might sell now or put in a trade stop that would protect against additional downside movement. (Strategy for stops is an entirely different topic and may be addressed in a future article.)

The possibilities on the upside seem limited at this point. On the other hand, the risk on the downside does not appear unusual. The phrase “kissing your sister” might be applicable to this trade thus far.

You pays your money and you takes your chances!