Try combining this pattern with PowerRatings

In today's article we're going to cover an Advanced PowerRatings strategy. TradingMarkets Director of Education, Steve Primo, teaches advanced PowerRatings classes every week day (click here for more info).

To recap: From 1995-2005, stocks rated 7 have outperformed the S&P 500 by a better than 4-1 margin over a five-day period. Stocks rated 8 have outperformed the S&P 500 by a better than 8-1 margin; stocks rated 9 have outperformed the S&P 500 by a 13-1 margin, and those stocks that have achieved a 10 PowerRating have outperformed the S&P 500 by a 16.9-1 margin. On the other hand, stocks rated 1, 2 and 3 have under performed the S&P 500 over a five-day period.

Bearing in mind that stocks with low PowerRatings under perform the S&P 500, let's take a look at a pattern for short selling.

Shorting Pattern #1: Inside Day

Quite simply an inside day is a day where the daily price range is completely within the prior day's price range. In other words, it has a lower high and higher low than the previous day.

Here's an example:

Inside days can be a sign of exhaustion on the part of buyers when an uptrend becomes extended. They can offer good risk/reward trades as your stop loss needs to be only slightly above the previous day's high.

In the chart below you can see an inside day that leads to a reversal. This inside day was accompanied by a low PowerRating and as you can see the stock declined over the next five days.

In the next two charts, both stocks had consecutive inside days, combined with low PowerRatings that were followed by declines over the next five days.

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Ashton Dorkins
Editor-in-Chief
editor@tradingmarkets.com

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