Pullback Preparation: 3 PowerRatings Stocks Ready to Drop

“Be Prepared” is the motto of the Boy Scouts of America. It should also be the motto of stock traders during this wildly overbought era. Overbought is a technical term that means the particular stock or market has over extended itself on the upside, thus is due for a pullback or drop.

Identifying these conditions, prior to the drop, in particular companies is the key factor in high probability stock shorting. Shorting is the process by which the investor profits as the price of the stock drops. Your broker lends you certain amount of shares at a particular price, then you sell them back making your profit/loss the difference between the selling and borrowing price. It’s a profitable method of short term trading IF you can correctly locate those stocks that possess the greatest odds of pulling back in the short term.

As you can see, a strong case can be made for the bear to awaken soon. How can the stock trader use this information to find names ready to drop, despite the roaring bull market currently? We have developed a simple 3 step plan to locate companies most likely to drop over the next 5 trading days. Remember, these same principles work whether or not an overall market drop occurs or not. In other words, they are stock, not market specific.

The first and most critical step is to only look at stocks trading below their 200-day Simple Moving Average. This assures that the stock isn’t in a long term uptrend that may likely continue.

The second step is to drill deeper into the list locating stocks that have climbed 5 or more days in a row, experienced 5 plus consecutive higher highs, or are up 10% or more. Yes, you heard me right, stocks that are climbing. I know this fly in the face of conventional wisdom of selling stocks as they fall further. However, our studies have clearly proven that stocks are more likely to fall in value after a period of up days than after a period of down days.

The third and final step is a combination of whittling the list down even further by looking for names whose 2-period RSI (RSI(2)) is greater than 97 (for additional information on this proven indicator click here) and the Stock PowerRating is 3 or lower.

The Stock PowerRatings are a statistically based tool that is built upon 14 years of studies into the inner nature of stock prices. It ranks stocks on a scale of 1 to 10 with one being the most volatile and most likely for short term drops and 10 proven to be the most probable for gains over the next 5 days.

The stocks that fulfill each of the above steps have proven in extensive, statistically valid studies to possess solid odds of dropping in value over the 1 day, 2 day and 1 week time frame.

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Learn more strategies for trading stocks in the short term with a free trial to our PowerRatings! The highest rated stocks have outperformed the average stock by a margin of more than 14.7 to 1 after five days! Click here to launch your free PowerRatings trial today!

David Goodboy is Vice President of Business Development for a New York City based multi-strategy fund.