Major Market Indexes Starting the Week Oversold

Friday’s selling pushed SPDR S&P 500 (NYSE: SPY) and ETFs tracking other major market indexes into oversold territory within an hour of the open. The PowerRatings web site offers traders a screen that allows them to monitor changes in PowerRatings throughout the trading day. Friday’s intraday action showed that the first hour of the day established the trend. Additional weakness on Monday morning would set up a high probability buying opportunity in SPY and other ETFs.


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.

SPDR S&P MidCap 400 (NYSE: MDY) is the most oversold index with a PowerRatings of 9. In the past, buying stocks with a rating of 9 on a 3% pullback the next day and selling five days later has been profitable 75% of the time with an average winner of 4.3%. Other entries and exits also show high winning percentages and large average gains.

Stock markets rarely move in one direction for an extended period of time. Quantified testing has shown that buying short-term pullbacks in long-term uptrends has been a profitable strategy. However, there is no way to know when the short-term trend will reverse. In this market environment, a scale-in strategy as explained in the Connors Research Guidebook ETF Scale-In Strategy could be useful. If the market continues to fall, scale-in trading provides the opportunity to add to your position at even better prices since you can continue to buy as prices go lower until you have established your full position. If prices go up, the advantage of scale-in trading is that you have obtained some exposure with a partial position and will profit from the move.

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All data is as of the end of day on 4/11/2014.