Should you buy lower lows or sell them?
Traders familiar with the “buy the selling, sell the buying” approach to short term swing trading were able to put this question to the test during the recent pullback in ^AAPL^.
Shares of Apple had rallied to overbought levels above the 200-day moving average in late August and, based on our research, were due for a short-term reversal.
But even as Apple closed for a second day in overbought territory, the stock had begun a pattern that would be key for short term swing traders only a few days later: a lower low.
Our research, based on thousands of simulated stock trades since 1995, shows that when stocks trading above their 200-day moving averages make multiple lower lows, the likelihood of that stock becoming oversold and due for a short term rally increases dramatically.
How dramatically? Our research into short term stock trading shows that stocks that have made five or more consecutive lower lows have made significant short term gains one-day, two-days and one-week later on average. Again, this goes back to 1995.
So in the case of Apple, all traders had to do was keep an eye on the stock to see if the initial lower low would be followed by another … and another …
As it turned out, sellers were not done with Apple. From its high on Tuesday, August 30th to its low a week later on September 6th, shares of Apple pulled back by well over 2%.
This pullback was a signal for short term traders that edges in Apple had now moved to the upside, not the downside. By selling off and making five lower lows in a row, the stock had pulled back toward a level where, historically speaking, it was statistically likely to make short term gains.
Shares of Apple closed at 379.74 on the day it made its fifth consecutive lower low. One day later, the stock was higher by as much as 1% and trading back above its 5-day moving average.
To learn how to swing trade stocks like Apple, click here to download a free copy of Short Term Trading Strategies That Work: A Quantified Guide to Trading Stocks and ETFs by Larry Connors, CEO and founder of TradingMarkets.com.
David Penn is Editor in Chief of TradingMarkets.com