There are a number of quantified trading strategies that can be used to identify potential buys. It is also possible to combine several strategies in an effort to increase the odds of success. When several independent strategies or indicators confirm a signal, there is a higher expectation that the trade should work. The table below identifies seven ETFs that are experiencing short-term pullbacks in a long-term uptrend.
The long-term uptrend is quantified with the 200-day moving average. When prices close above that moving average we consider the ETF to be in an uptrend. Each of these ETFs is trading above its 200-day moving average. The short-term pullback is confirmed by the three indicators shown.
The RSI25 strategy detailed in the book High Probability ETF Trading: 7 Professional Strategies to Improve Your ETF Trading. In back-testing on 20 of the most liquid ETFs for as long as the ETF had been traded, a period of up to 15 years, 77% of 786 buy signals with this strategy were winners, delivering an average gain of 1.06% with an average holding period of just over six days. These trades are entered when the 4-period RSI (RSI4) is under 25 and closed when the 4-period RSI closed above 55.
Strategies based on Bollinger Bands® (%b) are detailed in the book Bollinger Bands® Trading Strategies That Work. This indicator is usually considered oversold when readings fall below -0.20.
ConnosrRSI is explained in An Introduction to ConnorsRSI, 2nd Edition which can be downloaded for free here. That guidebook also includes the rules for a trading strategy based on ConnorsRSI along with proof that average 5-day returns of stocks rise after ConnorsRSI readings fall below 20.
Now let’s look at the most overbought and oversold stocks (according to ConnorsRSI) heading into trading for September 18, 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).
OI (Owens-Illinois) is the most oversold stock with a ConnorsRSI reading of 2.91.
RWX (SPDR DJ Intl Real Estate) is the most oversold non-leveraged ETF with a ConnorsRSI reading of 6.70.
NUGT (Direxion Gold Miners Bull 3X) is the most oversold leveraged ETF with a ConnorsRSI reading of 15.62.
ICE (Intercontinental Exchange) is the most overbought stock with a ConnorsRSI reading of 98.59.
ITB (Ishares DJ US Home Construction) is the most overbought ETF with a ConnorsRSI reading of 87.93.
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 9/17/2014.
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