There seemed to be two separate stock markets on Monday with SPDR Dow Jones Industrial Average ETF (NYSE: DIA) up 0.25% and SPDR S&P 500 ETF (NYSE: SPY) down only 0.07%. These indexes masked larger losses in small cap stocks and on the NASDAQ. iShares Russell 2000 (NYSE: IWM) fell 1.09% and PowerShares QQQ (NYSE: QQQ) was off 0.97%. Market breadth was uniformly bearish with just 33% of NYSE-listed issues closing up and only 22% of NASDAQ-listed issues ending higher.
With negative breadth it is not surprising to see a majority of sector ETFs oversold. The list below is maintained with the My PowerRatings Portfolio feature which allows traders to create watch lists that provide them with insights into the market. This portfolio includes thirteen SPDR sector funds. A majority of sectors are oversold with PowerRatings of 8 or higher. SPDR S&P Metals & Mining ETF (NYSE: XME) is the only ETF with a PowerRatings of 10. This ETF has been oversold for most of the past week.
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 9/15/2014.