European ETFs Oversold on Ukraine Fears

News from Ukraine seems to have taken a turn for the worse and ETFs with exposure to European stock markets have generally turned down. Among the losers, iShares MSCI Germany (NYSE: EWG) fell 1.34% yesterday and iShares MSCI Netherlands (NYSE: EWN) dropped 0.51%. Both ETFs will start trading today with a PowerRatings of 10. Other country ETFs are also oversold with PowerRatings of 8 or 9.


The chart of EWN is shown below. This ETF is below its 5-day moving average (the solid gold line in the chart). Prices tend to move above and below this moving average in the short-term. Buying when price is significantly below the average has been profitable in the past. Patience may be necessary to realize a gain and it could be beneficial to scale into positions, buying only a part of a full position at first and adding shares if prices continue to fall. This approach helps traders profit from the initial position if there is a quick reversal. Adding to the position if weakness continues lowers the average entry price and testing shows this increases the probability of success in the long term. This strategy is explained in the Connors Research Guidebook ETF Scale-In Strategy.


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 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.

European stocks could rebound quickly in a new driven market or the decline could continue if the news continues to worsen. A scale-in strategy can help traders reduce risk while increasing the probability of a profitable trade.

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All data is as of the end of day on 4/15/2014.