TradingMarkets 10 Rules for Successful Trading: Rule 4

Today's PowerRatings article will focus on Rule #4 of TradingMarkets 10 Rules For Trading.  Rule #4 states: Short Stocks Below Their 200-day Moving Average.

Since 1989, in spite of the major upward bull move, the market has returned (after 1-week) two-fifths of what it returned above the 200 day moving average. Said another way, the average weekly gain of the S&P 500 has been 2 1/2 times more above the 200-day moving average than below. What does this tell us? First, that it is tough to pick bottoms. Secondly, that it's better to be shorting stocks and the market when they are trading below the 200-day moving average. As we saw in rule Number 3, trend plays a strong role in determining the potential success of your trades.

A good place to start your search for downtrending stocks would be from our Pullback From Lows List.  Then they can be scanned through PowerRatings and stocks with a 3 or lower should be put on your watchlist.  Here are a few selections from our list:

Lets take a look at some individual stocks from our Pullback From Lows List that have a PowerRating of 3 or lower.

Yahoo! (YHOO | Quote | Chart | News | PowerRating)

Intervest Bancshares (IBCA | Quote | Chart | News | PowerRating)

inVentiv Health Inc. (VTIV | Quote | Chart | News | PowerRating)

From 1995-2005, stocks with a PowerRating of 8 have outperformed the S&P 500 index on average by an 8.3-to-1 margin, while a PowerRating of 10 doubles that performance to 16.3.

PowerRatings also help indicate a stock's downside as well as timely short-sale entry points; PowerRatings of 1 and 2 have on average lost money over the next week. A PowerRating of 1 typically underperformed the S&P 500 by a 5-1 margin. Obviously, you should ideally be looking to buy high PowerRating stocks and avoid (or short) low PowerRatings stocks.

Find tomorrow's winning stocks today! Click Here!

Attend a free class on how to use PowerRatings, presented by Steve Primo, our Director of Education.

Darren Wong
Associate Editor
darrenw@tradingmarkets.com

Want a free month of PowerRatings? Send us your PowerRatings strategy and receive one free month of this exciting trading tool. If you are already a monthly or annual PowerRatings subscriber, you will receive an additional three months if we publish your strategy.

Reminder: We are in no way recommending the purchase or short sale of these stocks. This article is intended for education purposes only. Trading should be based on your own understanding of market conditions, price patterns and risk; our information is designed to contribute to your understanding.