As stock market indexes and many individual stocks rallied to new all-time highs, commodities have been largely left behind. Heading into Tuesday’s trading, gold mining ETFs and Market Vectors Coal ETF (NYSE: KOL) are oversold with PowerRatings of 10.
Each of these ETFs has also declined at least four days in a row and are potential buys under variations of the strategies detailed in our guidebook, High Probability Trading with Multiple Up & Down Days. We demonstrated that buying after extended losing streaks could be profitable. Back-testing shows that buying an ETF with 4, 5 or 6 multiple down days after an additional 5% pullback has been profitable more than 80% of the time. These trades are closed when the ConnorsRSI ends the day above 70. This setup has also been profitable with other entries and exit rules.
ConnorsRSI also confirms that these ETFs are oversold with readings below 20.
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 8/25/2014.