Heading into Monday’s open, 14 stocks are potential buys under the fully disclosed rules of the ConnorsRSI Pullback Strategy. More than twenty variations of this strategy have win rates greater than 75%. Average gains per trade for the top twenty variations range from 6.7% to 13%. These variations are fully disclosed in the recently updated guidebook, An Introduction to ConnorsRSI, 2nd Edition, which can be downloaded for free here. This strategy identifies oversold stocks and takes advantage of the tendency for prices to revert to the mean in the short term.
Here are the entry rules for the ConnorsRSI Pullback Strategy:
- The stock price must be above $5 per share.
- The stock’s average daily volume over the past 21 days (one trading month) must be at least 250,000 shares per day.
- The stock’s 10-day Average Directional Index (ADX) is above 30.
- Today the stock’s lowest price is at least W% (W = 2, 4, 6, or 8) below the previous day’s close.
- Today’s close is in the bottom X% (X = 10 or 25) of the day’s range.
- The ConnorsRSI value of the stock is below Y, where Y = 5, 10, or 15.
- If the above rules are met today, buy the stock tomorrow on a further intraday limit Z% below today’s closing price (Z = 4, 6, 8, 10).
- Exit the position when the stock closes with a ConnorsRSI value above N (N = 50, 60 70 or 80), exiting at the closing price.
Let’s look at the reason for each rule.
Rules 1 and 2 are liquidity filters. By using highly liquid stocks we minimize the trading costs and maximize the probability of having orders filled. Illiquid stocks can have large spreads between the bid and ask prices which makes them costly to trade. There also might not be enough market depth to ensure an order is filled at the desired prices.
Rule 3 ensures the stock is trending. ADX measures the strength of a trend but doesn’t offer any information about the direction of the trend. Rules 4, 5 and 6 are used to quantitatively define a downtrend. Rule 7 enters the trade and rule 8 defines the exit for the trade.
Using TradingMarkets Live Screener we can find the information needed to complete an initial screen for buy candidates under this strategy. Although the Screener is a starting point to implement this strategy, the calculations required for rule 5 will need to be done separately. You would then need to enter orders for rule 7 and track open positions to identify when rule 8 is triggered.
The stocks set up as potential buys for Monday are listed in the table below. These stocks meet the setup rules (rules number 1 through 6 above). This list uses a value of 8 for W in rule 4, a value of 10 for X in rule 5 and a value of 5 for Y in rule 6.
ConnorsRSI is one of the tools we have developed over the years through research. Many of those tools are used in trading strategies and TradingMarkets.com is now offering a package that includes more than 100 quantified trading strategies that can be used to trade your own account or to operate a professional trading business. These strategies include short ideas in addition to long trading strategies.
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Now let’s look at the most overbought and oversold stocks (according to ConnorsRSI) heading into trading for December 1, 2014. ConnorsRSI is a proprietary and quantified momentum oscillator developed by Connors Research that indicates the level to which a security is overbought (high values) or oversold (low values).
IHS (IHS Inc) is the most oversold stock with a ConnorsRSI reading of 0.28.
HYLD (Peritus High Yield ETF) is the most oversold non-leveraged ETF with a ConnorsRSI reading of 3.24.
DIG (ProShares Ultra Oil & Gas) is the most oversold leveraged ETF with a ConnorsRSI reading of 3.63.
TEI (Templeton Emerging Markets) is the most overbought stock with a ConnorsRSI reading of 99.04.
CLY (Ishares 10+ Year Credit Bond) is the most overbought ETF with a ConnorsRSI reading of 97.62.
TradingMarkets Lists provide users pre-populated lists of stocks and ETFs identifying symbols with overbought and oversold ConnorsRSI and Bollinger Bands® readings. The Screener Lists are powered by The TradingMarkets Screener.
All data is as of the end of day on 11/28/2014.