As the broad stock market struggles to move higher, now is the ideal time to develop a trading plan for a potential bear market. ConnorsRSI can be a part of that strategy.
Most indicators measure only one aspect of the price action, most commonly momentum. ConnorsRSI is a unique indicator consisting of three components. Information about price momentum, the duration of the up/down trend and the relative magnitude of the recent price change are combined into a single value. Quantified back-testing involving approximately 6,000 highly liquid stocks over more than thirteen years showed that extreme values of ConnorsRSI are likely to predict a large price move. These test results are shown in the guidebook, An Introduction to ConnorsRSI, 2nd Edition which can be downloaded for free here. The results are summarized in the chart below.
You can see there is a tendency for stocks to fall after ConnorsRSI reaches an extreme overbought reading. The average 5-day loss for a stock that record a ConnorsRSI reading of 95 or higher is -0.94%. In a bull or bear market, these stocks could be ideal short selling candidates.
At the close on Thursday, five stocks had ConnorsRSI readings above 95.
These stocks could be considered as potential short trade candidates.
Now let’s look at the most overbought and oversold stocks (according to ConnorsRSI) heading into trading for August 8, 2014. ConnorsRSI is a proprietary and quantified momentum oscillator developed by Connors Research that indicates the level to which a security is overbought (high values) or oversold (low values).
MGLN (Magellan Health Services) is the most oversold stock with a ConnorsRSI reading of 1.58.
PPH (Market Vectors Pharmaceutical ETF) is the most oversold non-leveraged ETF with a ConnorsRSI reading of 6.02.
TMV (Direxion Daily 20+ Yr Trsy Bear 3X Shrs) is the most oversold leveraged ETF with a ConnorsRSI reading of 12.27.
PRSC (The Providence Service Corp) is the most overbought stock with a ConnorsRSI reading of 97.74.
IEF (iShares 7-10 Year Treasury Bond) is the most overbought ETF with a ConnorsRSI reading of 93.28.
TradingMarkets Lists provide users pre-populated lists of stocks and ETFs identifying symbols with overbought and oversold ConnorsRSI and Bollinger Bands® readings. The Screener Lists are powered by The TradingMarkets Screener.
All data is as of the end of day on 8/6/2014.