Small Cap Index ETFs Oversold After a 5-Day Losing Streak
iShares Russell 2000 (NASDAQ: IWM) is oversold after five consecutive down closes. After falling only 2.09% below its all-time high, the ETF is a possible buy candidate with a PowerRatings of 9. Leveraged ETFs tracking the small cap stock index are also oversold.
Each of these ETFs has a PowerRatings of 9, a ConnorsRSI reading below 20, a 2-period RSI (RSI(2)) reading below 10 and a Bollinger Bands ® (%b) reading below -0.45. ConnorsRSI and RSI(2) are considered oversold below 20 and %b is oversold below -0.20. A cluster of potential buy signals could improve the probability of success on any individual trade.
PowerRatings of 9 are already a high probability trading signal.
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.
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. The average winner has gained 4.3%. Other entries and exits also show high winning percentages and large average gains.
IWM is also a potential buy using strategies detailed in High Probability Trading with Multiple Up & Down Days. In that book, we demonstrated that buying ETFs after extended losing streaks can be a profitable trading strategy. In the guidebook, back-testing shows that buying an ETF with 4, 5 or 6 multiple down days after an additional pullback of 5% has been profitable more than 80% of the time. These trades are closed when the ConnorsRSI closes above 70. This setup has also been profitable with other entries and exit rules.
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All data is as of the end of day on 3/11/2014.