Heading into Tuesday’s open, a majority of sector ETFs were oversold with PowerRatings of 8 or higher. By the close just one sector ETF remained oversold, SPDR S&P Metals & Mining ETF (NYSE: XME), with a PowerRatings of 9.
The list above 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 ETFs.
Although most sector ETFs and ETFs tracking major stock market averages are ranked neutral by PowerRatings heading into Wednesday’s trading, there five ETFs that are potential buys with PowerRatings of 10.
Three of these ETFs track the stock market in India, one tracks stocks in Singapore and the fifth tracks a global real estate index. There are also a number of ETFs with PowerRatings of 9 that could be considered potential buys.
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 9/16/2014.