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Still waters run deep - and markets that see a dramatic decline in historic volatility often mask major opportunities for traders who are patient and disciplined enough to wait for the right moment.
Historical volatility has been a major topic in Larry Connors' Trading Lessons of the Day. The research he has done on historical volatility - which he discusses again this morning - shows that when short term historical volatility drops significantly below longer term historical volatility, markets have historically tended to make big moves.
Looking at the markets from a PowerRatings perspective, there is a larger number of top, 10-rated stocks than there has been since mid-May. It may be worth noting that mid-May was a period during which the markets traded largely sideways. In fact, the S&P 500 traded sideways for most of May, only moving aggressively higher over the final few days of the month.
Will similarly sideways trading in mid-June lead to another multi-day break to the upside? This is of course impossible to know, but it is very possible for traders to prepare and set themselves up for both near-term weakness now and a resumption of strength later by focusing on those stocks that have shown the highest historical tendency to outperform the average stock over the short term. Three such potential opportunities are noted below:
OptionsXpress (OXPS | Quote | Chart | News | PowerRating) is down again on Monday, having sold off for the past few days to reach its lowest closing levels since mid-May. The stock has earned a 2-period RSI of less than 4 early in trading and has earned a PowerRating of 10.
Also continuing to move lower is Jo-Anne Stores (JAS | Quote | Chart | News | PowerRating). The retailer actually has had its top 10-rating since the middle of last week and has now closed down for six consecutive trading days above the 200-day moving average. Our research has shown that stocks that close lower for five or more consecutive trading days above the 200-day moving average have tended to produce positive returns in one-day and one-week timeframes.
Befitting its status as a long-term (at least for us) 10-rated stock, Jo-Anne Stores has a 2-period RSI of less than 1 - an extremely oversold condition.
Lastly, shares of Visa Inc. (V | Quote | Chart | News | PowerRating) have come under distribution in recent days. Down two days in a row and three out of the past four, the stock has earned a PowerRating of 9 and a 2-period RSI of less than 6.
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Remember that stocks with PowerRatings of 9 have outperformed the average stock by a margin of more than 9 to 1 after five days according to our historical testing. Stocks with PowerRatings of 10 have fared even better, besting the average stock by a more than 14 to 1 margin over the same time period.
Our highest Short Term PowerRatings stocks have outperformed the average stock by a margin of more than 14 to 1 after five days. Click here to start your free, 7-day trial to our Short Term PowerRatings!
David Penn is Editor in Chief at TradingMarkets.com.
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