iShares MSCI Japan (NYSE: EWJ) ended trading Thursday with a PowerRatings of 10, the only ETF with the highest possible PowerRatings. Data from Trading Markets Analytics confirms that EWJ is oversold.
ConnorsRSI is just above the oversold level of 20. Bollinger Bands® (%b) and the 2-period RSI are below their oversold levels and indicate that EWJ is a potential buy.
EWJ has now been oversold for several days. The longer a short-term price trend persists, the more likely it is to end. However traders can never know when a trend will actually reverse. Traders can use a scale-in strategy if they are concerned about additional declines. This strategy is explained in the Connors Research Guidebook ETF Scale-In Strategy and can be applied equally well to stocks or ETFs. With a scale-in strategy, traders buy only a part of a full position at first and add 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. Back testing demonstrates scaling in can increase your probability of success in the long term.
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 10, 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 5.9%. Other entries and exits also show high winning percentages and large average gains.
All data is as of the end of day on 8/28/2014.