With the markets down in the first few hours of trading on Friday, a number of weak stocks that have been moving higher are now facing increased selling pressure from the broader market. Here are five such stocks for traders to focus on.
The weakness in the markets so far does not change the fact that stocks as a group have been moving sideways since the second half of April. This neutral stance in the market is supported by all of our proprietary market indicators. It is also supported by the fact that when we compare those the number of overbought stocks to the number of oversold stocks, we see a relatively small number of stocks that are making extreme readings in either direction.
That said it appears as if there are more overbought stocks that oversold one, on balance. And these are the stocks we are most interested in right now.
When markets move sideways, it allows for overbought and oversold extremes alike to moderate. But while some stocks are retreating from their extremes in a more measured way, there are always a number of stocks whose reaction to their overbought or oversold extremes is more dramatic. These are the stocks which tend to have greater profit potential for traders to the upside or downside, potential which is reflected in our Short Term PowerRatings.
Looking at the overbought side of the ledger, we are able to spot truly overbought stocks by using the 2-period Relative Strength Index. The 2-period RSI is our modified version of the standard 14-period RSI, which was created by technical analyst Welles Wilder Jr. decades ago. We find that our modified Relative Strength Index accomplishes two things that make it a superior indicator for short term stock traders compared to the standard RSI.
The first difference between our RSI and the traditional RSI is that ours looks only at 2 periods worth of data rather than 14 days. We feel—and our research backs us up—that this change better reflects the short term price action that drives stocks through the short term stock trader's "sweet spot" of 5 to 8 days.
The second difference between our indicator and the traditional Relative Strength Index is that our indicator is much more discriminating when it comes to considering stocks as overbought or oversold. The traditional RSI, to put it bluntly, is simply too generous for our purposes, allowing far too many stocks to be considered overbought or oversold.
We fixed this problem by raising the bar. Instead of stocks being considered oversold with RSIs of 30 or less, we say that a stock isn't oversold until its RSI falls below 10—and is not a seriously oversold stock until its RSI is less than 2. With regard to overbought stocks, rather than calling a stock overbought when its RSI rallies above 70—as is traditionally the case—we insist that a stock's RSI be greater than 90, minimum, with an RSI of 98 or more reflecting a truly overbought stock, in our opinion.
Click here to find out more about trading stocks using our 2-period RSI by reading our research report on the Relative Strength Index.
When looking at stocks with low Short Term PowerRatings then, using the Short Term PowerRatings as a screen to find those stocks that our research indicates are most likely to underperform the average stock in the short term, we use the 2-period RSI to select those stocks that are not only most likely to underperform based on their PowerRating, but also are displaying the sort of extreme RSI values that indicate a stock that has truly moved too far too fast.
Four of the five stocks in today's report have Short Term PowerRatings of 2, with the fifth stocks having a Short Term PowerRating of 1. Our research indicates that stocks with Short Term PowerRatings of 2 have performed worse than the average stock after five days, with 1-rated stocks actually underperforming the average stock by a margin of more than 4 to 1 after five days.
Alvarion Ltd. (ALVR | Quote | Chart | News | PowerRating) Short Term PowerRating 2. RSI(2): 99.61
ATP Oil & Gas (ATPG | Quote | Chart | News | PowerRating) Short Term PowerRating 1. RSI(2): 99.94
Charter Communications Inc.(CHTR | Quote | Chart | News | PowerRating) Short Term PowerRating 1. RSI(2): 99.98
Omnicell Inc. (OMCL | Quote | Chart | News | PowerRating) Short Term PowerRating 1. RSI(2): 99.20
Polycom Inc. (PLCM | Quote | Chart | News | PowerRating) Short Term PowerRating 2. RSI(2): 99.41
Does your stock trading need a tune-up? Our highest Short Term PowerRatings stocks have outperformed the average stock by a margin of nearly 17 to 1 after five days.
Whether you have a trading strategy of your own that could use a boost or are looking for a way to tell the stocks that will move higher in the short term from the stocks that are more likely to disappoint, our Short Term PowerRatings are based on more than a decade of quantified, back tested simulated stock trades involving millions of stocks between 1995 and 2007. Click the link above or call us at 888-484-8220, extension 1, and start your free trial today.
David Penn is Senior Editor for TradingMarkets.com
