Developed Markets Could Rally From Oversold Extreme
Last week’s market moves were largely driven by news. Traders wondered whether or not China’s economic slowdown and Russia’s involvement in the Ukraine would have a lasting impact on financial markets. In the short-term, we are unlikely to know the definitive answer to either question but we could see a rally in the stocks of developed markets as traders realize economic news should continue to overshadow political events. Economies of developed markets continue to deliver slow but steady growth and growing economies are generally accompanied by bull markets in stocks. Buying short-term dips in a long-term bull market can be the basis of a profitable trading strategy.
After falling 3.75% last week, iShares MSCI EAFE (NYSE: EFA) is now oversold. EFA offers exposure to large- and mid-capitalization developed market equities, excluding the U.S. and Canada. More than 50% of the components in the EAFE index are stocks that trade in the United Kingdom, France, Germany and Switzerland.
Heading into Monday’s trading EFA has a PowerRatings of 10.
PowerRatings are based on the relative strength or weakness of particular stocks or ETFs. 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.
In the past, buying stocks with a rating of 10 on a 3% pullback the next day and selling five days later has also been profitable 75% of the time with an average winner of 5.9%. Other entries and exits also show high winning percentages and large average gains.
ConnorsRSI confirms that EFA is oversold with a reading of 15.66. ConnorsRSI is considered oversold when it is below 20.
Multiple signals can highlight the best buy signals and both ConnorsRSI and PowerRatings indicate that EFA offers a high-probability trading opportunity.
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All data is as of the end of day on 3/14/2014.