Sectors are easy to track using the PowerRatings web site. There are dozens of ETFs tracking sectors traded every day. The My PowerRatings Portfolios feature can be used to create a watchlist tracking the sector ETFs that provide you with the information you consider to be the most important. The customizable features of PowerRatings recognize that each trader uses different information to develop a market opinion. Separate watchlists can be used to obtain this information at a glance. There are also a number of prebuilt lists that identify trading opportunities for overbought and oversold stocks and ETFs.
The table below shows a portfolio consisting of 13 SPDR ETFs, a group of funds that track broad sectors.
The sectors that are oversold with PowerRatings of 9 include utilities which are generally considered a defensive sector. Consumer discretionary stocks, biotechs and retailers also have PowerRatings of 9 heading into Tuesday’s open. This group indicates traders could be concerned about interest rates and consumer spending.
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 9, 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 4.3%. Other entries and exits also show high winning percentages and large average gains.
All data is as of the end of day on 9/22/2014.