Moving averages (MAs) are generally thought of as trend-following indicators. New research demonstrates that MAs are also useful as mean-reversion indicators. Trading Stocks & Options with Moving Averages; A Quantified Approach explains how to use MAs to find stocks that are oversold in the short-term and due for a bounce. The new guidebook provides specific rules to identify the best buy candidates and then provides precise sell rules. Readers can customize the parameters based on their preference for more or less trading activity.
Among the strategies in the book is one that buys when the 5-day MA drops significantly below the 10-day average while the price remains above the 200-day MA. This indicates the stock is pulling back in the short-term while in a long-term uptrend. The chart below shows that GAIN Capital Holdings (NYSE: GCAP) is set up as a potential buy under these rules.
GCAP has a limited trading history and there has only been one previous trade over the past three years in this stock. That trade gained 5.4% in three days. As shown in the guidebook, that performance is about average for this strategy. Testing on a broader list of stocks from January 2001 through the end of September 2013, this variation of the strategy has been profitable on 73.5% of its trades, gaining an average of 4.8% with an average holding period of just under four days.
Heading into Monday’s trading, three stocks in the Russell 2000 are set up as potential trades with this variation of the quantified MA strategy:
Albany Molecular Research
GAIN Capital Holdings
Trading Stocks & Options with Moving Averages – A Quantified Approach will be published on Dec 2, click here to pre-order your copy and save 20%!
The stock market is generally overbought and there are few long signals with any trading strategy. Under the PowerRatings system, for example, only two of the stocks in the S&P 500 index (Pitney Bowes (NYSE: PBI) and Freeport-McMoRan Copper & Gold (NYSE: FCX)) are on buy signals.
Weingarten Realty Investors
M.D.C. Partners Inc
ING Group N.V.
Short-Treasury Bond Ishares
DJ US Energy Ishares
Short QQQ Proshares
Australia Index MSCI Ishares
1-5 Year US Tips Index ETF Pimco
SHV is a short-term bond fund with low volatility. IYE may be the better trading opportunity.
Ultrapro Short QQQ Proshares
Ultrashort QQQ Proshares
3X Inverse Natural Gas ETN Veloc
Emrg Mkts Bear 3X Direxion
Ultrashort MSCI Emrg Mkts Prosha
This is the second day in a row that SQQQ has topped this list.
Universal Insurance Holdings Inc
Cross Country Healthcare
Chipmos Technologies [Bermuda] L
Taiwan Index MSCI Ishares
Germany Index MSCI Ishares
Preferred Portfolio Powershares
Global Listed Private Eq Powersh
All data is as of the end of day on 11/29/2013.