Leveraged ETFs provide traders with an opportunity to take long or short positions in major market indexes. There are a number of bull/bear pairs of funds as shown in the table below.
Bullish leveraged ETFs tracking the Dow, NASDAQ 100 and S&P 500 indexes are neutral according to PowerRatings and bearish leveraged ETFs are also rated neutral. Leveraged ETFs tracking the Russell 2000, an index of small cap stocks, are offering trading signals according to PowerRatings. In a typical market move, small caps stocks are expected to be leaders and could be the first group of stocks to become overbought in an up move. If the Russell 2000 is leading the broad stock market, we should expect other indexes to offer potential sell signals in the next several days.
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 8, on a 5% pullback the next day and selling after the stock closes above its 5-day simple moving average has been profitable 72% of the time with an average gain of 3.9%. Other entries and exits also show high winning percentages and large average gains.
All data is as of the end of day on 9/2/2014.