In a volatile market like we’ve experienced recently, short-term traders can enjoy large gains in just days. Leveraged ETFs can be used to increase the potential trading gains. For example, SPDR S&P 500 ETF (NYSE: SPY) gained 4.3% in the final three days of last week. ProShares Ultra S&P500 (NYSE: SSO) is designed to move twice as much as the S&P 500 on any given day and gained 10.0% over that same time. ProShares UltraPro S&P500 (NYSE: UPRO) is designed to move three times as much as the S&P 500 on any trading day and gained 15.1% from Tuesday’s close to Friday’s close last week.
As this example demonstrates, with the right strategies, leveraged ETFs can be profitable for short-term traders. In the guidebook Trading Leveraged ETFs with ConnorsRSI we provide details on two dozen strategy variations with a win rate above 90% and 15 strategy variations with an average profit/loss per trade of 9% or more. These are short-term trades with an average holding period of only 4.71 days across all variations.
The ConnorsRSI Leveraged ETF Strategy also utilizes a concept known as scaling in, which allows us to increase our position size as the trade becomes more attractive. The general rules for scaling in can be applied to other strategies as explained in the guidebook ETF Scale-In Trading. This guidebook will teach you the specific professional disciplines you need to “scale-in” correctly. The book contains over 80 variations with specific entry/exit rules and scale-in ratios. More than 20 variations show a winning trade rate over 92.8% of the time. Thirteen variations show an average profit/loss per trade of over 4.0% and the average holding period is only 2.63 days across all variations.
For the ConnorsRSI Leveraged ETF Strategy, if the leveraged ETF meets minimum liquidity requirements, a buy setup is completed when the ConnorsRSI value of the leveraged ETF is deeply oversold and other conditions are met.
Heading into Monday’s open two leveraged ETFs meet all of the setup requirements.
Both of these ETFs are also potential buys with a PowerRatings of 9.
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.
Now let’s look at the most overbought and oversold stocks (according to ConnorsRSI) heading into trading for December 22, 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).
WGO (Winnebago Industries) is the most oversold stock with a ConnorsRSI reading of 4.64.
SJB (Short High Yield Proshares) is the most oversold non-leveraged ETF with a ConnorsRSI reading of 7.36.
ERY (Energy Bear 3X Direxion) is the most oversold leveraged ETF with a ConnorsRSI reading of 5.53.
HIIQ (Health Insurance Innovations I) is the most overbought stock with a ConnorsRSI reading of 99.19.
IYE (DJ US Energy Ishares) is the most overbought ETF with a ConnorsRSI reading of 95.52.
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 12/19/2014.