Major stock market averages ended Friday down for the day. SPDR S&P 500 ETF (NYSE: SPY) ended the day with a loss of 0.58%, a loss that pushed the ETF into slightly negative territory for the week. SPDR Dow Jones Industrial Average ETF (NYSE: DIA) dropped 0.36% on Friday and closed 0.79% lower for the week. Heading into Monday’s open, both of the ETFs are oversold with PowerRatings of 8. The table below shows several other ETFs tracking major stock market averages that are rated neutral.
Global stock markets were also down on Friday. Vanguard Total World Stock Index Fund (NYSE: VT) and Vanguard FTSE Emerging Markets ETF (NYSE: VWO) both closed with losses on the day and both are oversold according to PowerRatings. VWO will start trading on Monday 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.
All data is as of the end of day on 9/12/2014.