On Tuesday, the World Bank lowered its outlook for global economic growth and a number of stock markets around the world sold off. Many ETFs tracking stock market indexes for countries in Asia, Latin America, Europe and the U.S. ended the day down. As a result, a number of country funds will head into Wednesday’s open with PowerRatings buy signals. PowerRatings of 8 or higher are potential buys.
Each of these ETFs is also a potential buy under at least one of the variations detailed in High Probability Trading for International ETFs, our newest guidebook. This is the first time our research has shown that mean reversion is applicable in the prediction of short-term moves in global stock markets. The strategies in this guidebook do not rely on momentum or other widely followed indicators to identify buy candidates. Some variations of these strategies have win rates of more than 80%. The table below shows the average performance for several variations of this strategy.
This strategy can also be used in the U.S. stock market. Test results show performance — especially accuracy – trading the SPDR S&P 500 ETF (NYSE: SPY) to be even stronger than in international markets.
Consistent Trading Results for Trading Strong Upward Moves
Each of these ETFs is also a potential buy under a simple PowerRatings trading strategy.
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 10/7/2014.