Wall Street is filled with old sayings. One of the most popular has long been “buy the rumor, sell the news.” This is an idea that defies quantification and is un-testable. However, if it is true, there is reason to expect that traders will take short-term profits. Those reasons are based on quantifiable indicators shown in the table below.
ConnosrRSI is explained in An Introduction to ConnorsRSI, 2nd Edition which can be downloaded for free here. That guidebook provides test results showing that when ConnorsRSI rises above 80, the average five-day returns on stocks falls. This test was completed using data on approximately 6,000 highly liquid stocks from January 2, 2001 through February 28, 2014
As explained in the guidebook, testing was completed by assigning each stock to one of twenty different “buckets” corresponding to its ConnorsRSI value at the close of trading on that day. Stocks with ConnorsRSI values of less than 5 went into the 0 bucket. Those with ConnorsRSI values greater than or equal to 5 and less than 10 were placed in the 5 bucket, etc. Next, for each of the 20 buckets we calculated the five-day return of each stock for every day in the test period, and averaged those values within each of the 20 buckets. In simple terms, we determined the typical 5-day price move (as a percentage) of a stock whose ConnorsRSI value fell into a particular bucket. More than 4.9 million different trading opportunities were tested with this process. The results are summarized in the table below.
Average 5-day returns tend to decrease as the ConnorsRSI readings rises above 80.
Strategies for trading the 2-period RSI (RSI2) are detailed in High Probability ETF Trading: 7 Professional Strategies to Improve Your ETF Trading. 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.
ETFs tracking European stock markets are near overbought readings or are overbought on several indicators. Traders can obtain intraday updates on these indicators with the live screener at the The TradingMarkets Screener web site.
Now let’s look at the most overbought and oversold stocks (according to ConnorsRSI) heading into trading for September 19, 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 3.11. This is the second consecutive day OI is the most oversold stock.
DOG (Proshares Short DOW 30) is the most oversold non-leveraged ETF with a ConnorsRSI reading of 8.64.
SDOW (Proshares Ultrapro Short DOW 30) is the most oversold leveraged ETF with a ConnorsRSI reading of 8.02.
CME (CME Group) is the most overbought stock with a ConnorsRSI reading of 99.33.
BIL (SPDR Barclays 1-3 Month T-Bill ETF) is the most overbought ETF with a ConnorsRSI reading of 97.66.
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 9/18/2014.