Recent stock market volatility has led to a large list of oversold stocks and ETFs. At the PowerRatings web site, traders have access to a number of one-click lists that can be used for trading ideas or to develop general insights into the short-term state of the stock market.
One list shows stocks that have a PowerRatings of 9 or 10. Heading into Friday’s trading there is just one stock with a PowerRatings of 10, the highest possible rating. That stock is Multimedia Games Holding Company (NASDAQ: MGAM). This company is being bought out which indicates the stock could have limited upside potential if the deal is completed as planned.
Traders preferring more volatile trading opportunities can look at the lists of oversold ETFs and leveraged ETFs. There are 39 ETFs and 12 leveraged ETFs that will start trading on Friday oversold with a PowerRatings of 10.
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 10/2/2014.