SPDR S&P 500 ETF (NYSE: SPY) fell 1.36% on Wednesday and is now 7.8% below its all-time high which was reached less than two weeks ago. Selling was broad based on Wednesday with 74% of NYSE-listed stocks down for the day and 76% of NASDAQ-listed issues lower. The selling has pushed SPY, SPDR Dow Jones Industrial Average ETF (NYSE: DIA) and SPDR S&P MidCap 400 ETF (NYSE: MDY) into oversold territory. These ETFs each have PowerRatings of 10, the highest possible rating, heading into Thursday’s open.
Five sector ETFs are also oversold with a PowerRatings of 10. The list below is maintained using the My PowerRatings Portfolio feature at the PowerRatings web site. This portfolio consists of the 13 SPDR sector ETFs.
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.
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All data is as of the end of day on 10/1/2014.
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