Stock prices were generally down on Tuesday with all of the major stock market indexes closing lower. On the New York Stock Exchange, 69% of the issues traded closed with a loss while 68% of NASDAQ-listed stocks were down for the day. The TradingMarkets Screener shows that 76% of ETFs with average daily trading volume of at least 100,000 shares and a price above $5 were down. The list of most actively traded ETFs available at the PowerRatings web site showed seven of the top ten most active ETFs are heading into Wednesday’s open oversold with a PowerRatings of 8 or higher.
This list includes emerging markets, gold mining stocks, financials and SPDR S&P 500 ETF (NYSE: SPY). ConnorsRSI, the 2-period RSI and Bollinger Bands® (%b) confirm that SPY is oversold and should be considered a buy 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 9/23/2014.