Stocks sold off broadly on Tuesday. Just 22% of the stocks listed on the New York Stock Exchange ended the day higher while only 23% of NASDAQ-listed issues were up. ETFs tracking all major stock market averages were down. Small caps suffered the largest losses and iShares Russell 2000 (NYSE: IWM) fell 1.18%.
Sector ETFs were also broadly lower. At the PowerRatings web site traders can use the My PowerRatings Portfolio feature to create watch lists that provide them with insights into the market. The list of sector ETFs shown below was created with that feature. This portfolio includes thirteen SPDR sector funds. A variety of sectors are oversold with PowerRatings of 8 or higher. Natural resources, including mining and oil companies, have shown weakness for several days. SPDR S&P Metals & Mining ETF (NYSE: XME) is the only ETF with a PowerRatings of 10.
PowerRatings are based on the relationship between price and the 5-day moving average (MA) of price. The further prices move away from the 5-day MA, the stronger the tendency to snap back becomes. PowerRatings uses the 5-day MA and several other components to identify high probability trade entry points. This strategy was thoroughly back tested and the history of over 4 million trades was analyzed.
We know from back testing that PowerRatings can be used as the basis of a trading strategy. Detailed back testing has confirmed that the higher the rating, the greater the one week historical gain has been for stocks and ETFs with that rating. For best results, enter trades on stocks with a PowerRatings of 8 or higher with a limit order 3-7% below the previous day’s closing price. Higher % limit entries have historically shown a greater percentage of winning trades but higher % limit orders also reduce the chance of trade execution.
As an example of a trading strategy that can be used, in the past, buying stocks with a rating of 10, on a 3% pullback the next day and selling after the stock closes above its 5-day simple moving average has been profitable 75% of the time with an average gain of 5.9%. Other entries and exits also show high winning percentages and large average gains.
All data is as of the end of day on 9/9/2014.