As Larry Connors noted this morning in his Daily Battle Plan‘s “Morning Market Commentary” (click here to launch your free, one-week trial), it remains to be seen whether or not the sharp decline that ended last week is over, or whether or not there is additional selling to be done.
When markets are as volatile as the current one has become, there are a lot of things traders can do to defend themselves and their positions. The easiest strategy is to reduce position size. Trade fewer units – or even cut your regular trading size in half – if you are feeling uncomfortable about the way the market has been trading over the past few days. You can always get in later.
The recent volatility, however, has created a number of short term opportunities in stocks and ETFs – as I have been noting in recent columns (see my Friday morning column, High Probability Trading Report: Greek Debt, Goldman Sachs and Data-Driven Trading.) Today, we will look at how some of these opportunities developed late last week and how Monday’s rally helped traders who took advantage of these opportunities lock in gains in a variety of stocks and ETFs.
Stocks:
Although the focus of today’s report will be on exchange-traded funds, there were a number of stocks that had been previously oversold that rallied into strength on Monday. Among this group of stocks were familiar names like ^C^, which earned a Stock PowerRating of 9 on Thursday and closed up 4%, and less familiar names like the ^BBW^, which earned a top Stock PowerRating of 10 on Friday and closed higher on Monday by well over 13%.
The huge number of stocks that earned Stock PowerRatings of 10 going into trading on both Friday and Monday meant that traders did not have to look far for potential trades. Going forward, that number is significantly smaller. But even here there are a few stocks that still have top Stock PowerRatings that traders might want to keep an eye on over the next few days. These stocks include ^SLXP^ and ^BONT^, both of which have Stock PowerRatings of 9.
Exchange-traded Funds (ETFs):
Our High Probability ETF Trading Software (click here to try it our for free for 7 days) was an exit machine on the close on Monday. Nearly 10 ETFs earned six exit signals (meaning six different strategies) and another five funds earned exit signals from every single one of our high probability ETF trading strategies.
Remember that the high probability ETF trading signals from the High Probability ETF Trading Software are based on the seven professional trading strategies in the book by Larry Connors and Cesar Alvarez, High Probability ETF Trading. These quantified and backtested strategies range from indicator-based techniques like RSI 10/6 or simply chart-based like the 3-Day High/Low Method, but all of them are geared toward producing the same result: high probability entries and quantified, high probability exits.
Above is an example of one of the trades from the High Probability ETF Trading Software, this one involving the ^IYR^.
This ETF earned trading signals in all 7 of our high probability ETF trading strategies and rallied into strength on Monday, providing an opportunity for short term traders to lock in gains.
Another example can be found in a country fund: the ^EWC^ (above). This one is especially interesting insofar as a large number of country funds have fallen below their 200-day moving averages and are no longer worth considering for high probability trades to the long side.
Given the recent strength, some of the only ETFs that are oversold going into Tuesday’s trading are bond-related ETFs like the ^TIP^ and the ^TLT^. Both ETFs were up a modest amount early in trading on Tuesday.
David Penn is Editor in Chief at TradingMarkets.com.