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Despite Tuesday's pause, the rally on Monday has dramatically reduced the number of 9- and 10-rated stocks compared to a few days ago when the ranks of these highest possible PowerRatings stocks was higher than it had been at any other point this year.
Looking at our Top 25 PowerRatings list as of Wednesday morning, for example, there is only one 10-rated stock and 4 9-rated stocks compared to 11 10-rated stocks and 14 9-rated stocks just a week ago.
Unsurprisingly, the S&P 500, Nasdaq and Dow Industrials are all overbought - though the Nasdaq is now above its 200-day moving average. This means that our next big buying opportunities in stocks are likely to be around the corner of the current rally - and, as Larry Connors suggests in today's Trading Lesson, potentially around the corner of a three-day holiday weekend.
When high PowerRatings stocks appear in the context of overbought markets, traders may want to wait for larger than normal intraday weakness before taking positions. This is because the prevailing overbought conditions are likely to be met with selling in the short term, and this selling is likely to push many high PowerRatings stocks even lower than current levels.
Because of this, waiting for an intraday pullback of 5, 6 or 7% might help traders get even better entries than looking to enter high PowerRatings stocks after a more modest intraday pullback of 2 or 3%.
Of course, waiting for deeper pullbacks - which have tended to produce both higher win-rates and higher percentage gains relative to more shallow pullbacks - means that there is an increased likelihood that a trade may be missed should the stock not pull back as far as expected.
Tower Group Inc. (TWGP | Quote | Chart | News | PowerRating) PowerRating of 8. TWGP has been increasingly volatile over the past week, particularly as buyers have repeatedly stepped in to bid shares off their lows in recent days. With a 2-period RSI of less than 5 as of Tuesday's close, TWGP's RSI(2) has increased to more than 39 shortly after the open Wednesday morning.
The Providence Service Corporation (PRSC | Quote | Chart | News | PowerRating) PowerRating of 8. Closing lower for three out of the past four sessions above the 200-day moving average, PRSC's 2-period RSI has fallen from above 30 to below 16 within the first hour of trading on Wednesday
Hansen Natural Corporation (HANS | Quote | Chart | News | PowerRating) PowerRating of 8. HANS has a 2-period RSI of less than 6 and has closed lower for the past three consecutive days going into Wednesday's trading.
Remember that our research indicates that stocks with PowerRatings of 8 have outperformed the average stock by a margin of more than 6 to 1 after five days.
David Penn is Editor in Chief at TradingMarkets.com.
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