Small Caps Oversold on Seven High Probability Trading Strategies

March 27, 2014
TradingMarkets Editors

This week’s stock market selloff has been following a pattern indicating the pullback is most likely a dip in the long-term uptrend. In an orderly market, small caps lead the way higher or lower followed by mid caps and then large caps. After yesterday’s decline, ETFs that track small caps and mid cap indexes are oversold with PowerRatings of 10 for small caps, iShares Russell 2000 (NYSE: IWM), and 9 for the mid cap ETF SPDR S&P MidCap 400 (NYSE: MDY).

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 10 on a 3% pullback the next day and selling five days later has been profitable 75% of the time with an average winner of 5.9%. Other entries and exits also show high winning percentages and large average gains. 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%.

IWM is a potential buy and meets the requirements for all of the setups identified in the book High Probability ETF Trading: 7 Professional Strategies to Improve Your ETF Trading.

Looking beyond market cap, there are a number of potential trading opportunities. ETFs tracking retailers, consumer discretionary stocks, home builders and biotech stocks all have PowerRatings of 10. Several other sector ETFs have PowerRatings of 9 or 8.