The winners of the past six months are likely to be among the
best performers in the next six months, according to research
published in a number of academic studies. Andrelative strength
(RS) can be used to find the biggest winners of the past six
months. We can calculate RS to find the best trades in the
U.S.market , or even apply the calculation to all of the stocks and
trading around the world.
Using U.S. markets, we can identify the strongest trades from
more than 7,000 stocks and ETFs. Adding global stock markets, we
can find the top trading candidates from a list of more than 26,000
stocks and ETFs. Although I would only trade stocks or ETFs that
trade in the United States, knowing that the trade is one of the
strongest in the world boosts my confidence that this trade is
likely to be a winner.
One way to apply RS is to buy stocks when their RS rank is above
80, meaning the stock orETF has outperformed 80% of the alternative
investments during the past six months. Right now, I was surprised
to see one ETF on the buy list using both the U.S. and global
iShares MSCIEAFE Index Fund (
With an RS rank of 99, this ETF has outperformed more than 99%
of U.S. investments during the past six months. In addition, EFA
has a global RS rank of 82. This strength makes EFA a buy.
The ETF holds the largest stocks in the world's leading stock
. Because EFA is abenchmark for international stock performance, it
points toward potential strength in global large-cap stocks. These
are the kind of stocks that could do well if economic growth is
better than expected around the world, or if traders become
interested in dividend-paying stocks as an alternative to the low
interest rates available in globalbond markets.
There are a number of reasons why EFA could go higher in the
months ahead, but RS doesn't tell us why prices should go up. The
indicator simply tells us that EFA is likely to be among the best
performers in the next six months and is a buy.
In the past, EFA's global RS rank has topped 80 thirteen times
since it began trading in 2001. Buying when RS crossed above 80
would have delivered winning trades 10 times (77% of the time) and
the average gain a month after the signal was given is 11.35%. This
time, I think the gain could be almost twice that level within six
During the past year, EFA has formed a double-bottom pattern.
The depth of that pattern provides aprice target of $64.49, about
20% above the recent price. Based on the combination of RS
indicators, that target seems realistic.
The last time both U.S. and global RS were on a buy was in 2009,
and the ETF gained more than 39% over 28 weeks. There have only
been three signals like this in the past, and all were winners over
the next three months. But three trades is a very small sample
size, so we can't really draw conclusions from that.
Risk can be managed with the 10-monthmoving average . This
long-term indicator is useful for spotting long-term trend changes.
If EFA closes below that average, which is at $52.29, it could
indicate that stocks have entered abear market . Using that price
as a stop-loss level limits risk to less than 3%, an exceptionally
small amount of risk for any trade.
Action to Take -->
Buy EFA at themarket price . Set stop-loss at $52.29. Set price
target at $64.49 for a potential 20% gain in six months.
This article originally appeared on TradingAuthority.com:
Surprising Investment Beating 99% of the Market
is Signaling a 'Buy'
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