The European Central Bank (ECB) surprised traders with an interest rate cut on Thursday. The ECB also announced plans to expand an easy money policy and took several other steps in an effort to spur economic growth in the euro zone. Reaction in the stock market was mixed as early gains in U.S. stocks were erased in afternoon trading. European stock markets were generally lower. Currency traders turned bearish on the euro and Bloomberg reported that the currency fell against 31 currencies. The euro was down 1.6% against the U.S. dollar and fell to a 14-month low.
Leveraged ETFs tracking the euro ended Thursday oversold. Market Vectors Double Long Euro ETN (NYSE: URR) and ProShares Ultra Euro (NYSE: ULE) are the only two leveraged ETFs heading into Friday’s trading with PowerRatings of 9 or 10.
These ETFs should be considered potential buys on additional weakness.
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 9, 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 4.3%. Other entries and exits also show high winning percentages and large average gains.
All data is as of the end of day on 9/4/2014.