High PowerRating, Low Price: 5 Oversold Stocks for Traders

Friday’s intraday reversal was in many ways exactly the opposite of the kind of intraday weakness we encourage traders to look for before buying stocks in the short term.

When markets start out strong, but then fade late in the day, most traders know that this sort of intraday weakness—usually called an intraday reversal—often hints at a market that may not be as strong as its early-session bullishness suggests. Typically, traders wait to see if that strength returns on the following day (Monday, or even Tuesday, in this case). And more often than not many traders will find it hard to give the market the benefit of the doubt until then.

Given the volatility of the market since October 2007, it is hard to blame them. But this kind of intraday weakness is very different from the sort of intraday weakness that swing traders use to buy stocks at the lowest possible price.

As we found during our model-driven historical testing of millions and millions of stocks between 1995 and 2007, traders who buy strong stocks as they pullback gain a powerful edge that many traditional swing traders do not have. By focusing on oversold stocks pulling back, we have been able to achieve both high percentage trades, as well as consistent gains with minimal drawdowns.

But more than just buying pullbacks, our research revealed that by waiting to buy stocks on an intraday basis at a level below that of the previous close, we can secure an even more powerful edge. While this approach means that there may be trades that we miss—some stocks will not move down any further after we note them as sufficiently oversold—the stocks that we do catch, the trades that we allow to "come to us" will be more than worth the wait.

That is why we recommend what I’ve called the "two pullback" approach to buying strong stocks as they move lower. The first pullback in the daily chart shows us the stock as one that is pulling back and becoming less expensive. The second "pullback" occurs when the stock moves lower, below the previous close, in subsequent sessions, with that additional weakness being a sort of final capitulation that tells us there is potential for upside in the short term.

All of the stocks in today’s report not only have Short Term PowerRatings of 8--putting them in that class of stocks that, according to our research, have outperformed the average stock by a margin of more than 8 to 1. These stocks are also inexpensive on a dollar basis, as well, with prices ranging from around $15 per share to less than $2 per share.

Lastly, note in each case the 2-period Relative Strength Index values. We use the 2-period RSI to determine whether a stock is oversold enough to warrant our attention as a potential trade to the long side. A stock with a 2-period RSI of less than 10 is considered to be oversold. We become particularly interested in stocks as their 2-period RSIs drop below 2.

Northstar Realty (NRF | Quote | Chart | News | PowerRating) Short Term PowerRating 8. RSI(2): 53.06

Ion Geophysical Corporation (IO | Quote | Chart | News | PowerRating) Short Term PowerRating 8. RSI(2): 5.55

Union Drilling Inc. (UDRL | Quote | Chart | News | PowerRating) Short Term PowerRating 8. RSI(2): 45.87

W-H Energy Services (WHQ | Quote | Chart | News | PowerRating) Short Term PowerRating 8. RSI(2): 2.78

Quantum Fuel Systems (QTWW | Quote | Chart | News | PowerRating) Short Term PowerRating 8. RSI(2): 2.13

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