Scale-In Strategy Could Benefit From Market Weakness

ETFs tracking all major stock market averages except PowerShares QQQ (NASDAQ: QQQ) are oversold with PowerRatings of 9 or 10.


Oversold markets can become more oversold and there is no way to tell when a selloff will end. In markets like this, a scale-in strategy as explained in the Connors Research Guidebook ETF Scale-In Strategy, could be useful. If the price of SPDR Dow Jones Industrial Average (NYSE: DIA), one of the other oversold index funds, or a leveraged fund like ProShares UltraPro Dow30 (NYSE: UDOW) goes up, the advantage of scale-in trading is that you have obtained some exposure to the market and will benefit from a profitable position. If prices go down, scale-in trading provides the opportunity to add to your position at even better prices and you can continue to buy as prices go lower until you have established your full position.

PowerRatings are based on the relative strength or weakness of particular stocks or ETFs. The higher the rating, the greater the one week historical gain has been for stocks and ETFs with that rating. For best results, enter trades on stocks with a PowerRatings of 8 or higher with a limit order 3-7% below the previous day’s closing price. Higher % limit entries have historically shown a greater percentage of winning trades but higher % limit orders also reduce the chance of trade execution.

In the past, buying stocks with a rating of 10 on a 3% pullback the next day and selling five days later has been profitable 75% of the time. The average winner has gained 5.9%. Other entries and exits also show high winning percentages and large average gains.

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All data is as of the end of day on 1/29/2014.