Traders might be struggling to understand the direction of the long-term trend in stock prices after last week’s 4.2% rally in SPDR S&P 500 (NYSE: SPY). That ETF has now retraced more than half of the 9.9% decline that began in September. SPY is now once again above its 200-day moving average and is overbought with a PowerRatings of 3. PowerRatings below 3 indicate a stock or ETF is overbought. The 2-period RSI confirms that SPY is overbought in the short term with a reading of 82.84. Readings above 80 in this indicator are generally considered overbought.
Although SPY and ETFs tracking other major stock market indexes are overbought, PowerRatings does identify a number of short-term buying opportunities heading into Monday’s open.
ConnorsRSI can also be used to identify buy candidates for Monday. The list shown below can be generated with The TradingMarkets Screener.
RSI2, the 2-period RSI, confirms each of these ETFs are oversold. All except ProShares Ultrashort Dow 30 (NYSE: DXD) are oversold according to RSI4, the 4-period RSI, with readings below 25. The U/D column shows that each ETF has declined for at least 2 days in a row. Multiple down days can be used to develop a trading strategy.
Multiple down days are useful for traders because in the short term, the longer a trend persists the more likely it is to end. We have shown this with quantitative testing and provided the results in our guidebook, High Probability Trading with Multiple Up & Down Days. In that book, we demonstrated that buying ETFs after extended losing streaks could be profitable. Back-testing shows that buying an ETF with 4, 5 or 6 multiple down days after an additional 5% pullback has been profitable more than 80% of the time, for example. In the back test, trades are closed when ConnorsRSI ends the day above 70. It’s also important to note that multiple down days are not the same as consecutive down days. This strategy has also been profitable with other entries and exit rules.
Now let’s look at the most overbought and oversold stocks (according to ConnorsRSI) heading into trading for October 27, 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).
FXCM (FXCM) is the most oversold stock for the second day in a row with a ConnorsRSI reading of 3.78.
WIW (Western Asset/Claymore Inflatio) is the most oversold non-leveraged ETF with a ConnorsRSI reading of 9.15.
TECS (Direxion Technology Bear 3X) is the most oversold leveraged ETF with a ConnorsRSI reading of 18.30.
IDXX (Idexx Laboratories) is the most overbought stock with a ConnorsRSI reading of 99.41.
XLU (Utilities Select Sector SPDR) is the most overbought ETF with a ConnorsRSI reading of 94.35.
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 10/24/2014.