Stock Trading: Should You Buy Short Term Highs Below the 200-Day?
Should you buy short term highs below the 200-day moving average?
The data says no.
Two of the biggest edges in short term stock trading suggest strongly that traders be careful about buying stocks making short term highs below the 200-day moving average.
Edge 1: In the short term, stocks making short term lows outperform stocks making short term highs.
Edge 2: In the short term, stocks trading above the 200-day moving average outperform stocks trading below the 200-day moving average.
This research is published in Short Term Trading Strategies That Work: A Quantified Guide to Trading Stocks and ETFs, the best-selling book by Larry Connors and Cesar Alvarez, founder and Director of Research respectively for the Connors Group.
You can download your copy of Short Term Trading Strategies That Work here. For free.
Larry and Cesar’s research into stock trading comes to mind watching a number of financial stocks closing higher again ahead of trading on Tuesday. In a market that has been reluctant to provide gains in recent days, these advancing financials below the 200-day are likely to be a tempting target for many traders.
The question is whether they will be targets for buyers or targets for sellers.
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Among the financial stocks closing higher for multiple days below their 200-day moving averages are ^WFC^ and ^C^.
Shares of WFC closed higher by more than 2%. Citigroup gained more than 3%. Both stocks have closed higher for three days in a row and are near overbought territory.
Sellers remained on the offensive in the market for energy stocks ahead of trading on Tuesday. Down more than 4% in Monday’s session were stocks like ^NBR^ (below), an oil and gas drilling and exploration company, whiles oil independent, ^COG^ pulled back by more than 3%.
Note that COG is pulling back from recent year-to-date highs while NBR is trading at its lowest levels since February.
The big gainer in the S&P 500 on Monday was ^VFC^ (below)
Shares of VFC rallied by 10% ahead of trading on Tuesday. The stock had become very oversold in the first few days of June, closing in oversold territory for four days in a row.
The catalyst for the stock’s gains was news that it was purchasing retailer ^TBL^. TBL, which had also been oversold in early June, soared by more than 40%.
Watch what they say about the consumer rather than what do as a company? That seems to be Jim Cramer’s advice when it comes to the earnings announcement from ^BBY^ on Tuesday. Shares of BBY are trading below the 200-day moving average and near their lowest levels of the year.
David Penn is Editor in Chief of TradingMarkets.com