Oversold and Lower Lows: 2 Stocks for Traders
With the sharp move off the bottom in late November and the subsequent sideways trading the followed, the number of tradable, high PowerRatings opportunities to the upside has temporarily subsided.
Looking to our
TradingMarkets Stock Indicators page, we can see that while there are a number of stocks that appear in our screens for bullish and bearish opportunities, there are far more stocks that are “in the red” for the bears than are “in the green” for the bulls. Many of those “loaded” bearish screens are noting the fact that a number of stocks that have rallied for several consecutive days remain below the 200-day moving average. The TradingMarkets approach to trading emphasizes buying weakness and selling strength, and for those who sell stocks short, there is no better strength to sell than strength below the 200-day moving average.
I will talk more about these bearish opportunities in tomorrow’s TradingMarkets Indicators discussion. For today, I want to give the bulls their modest due by looking at two of the few, high PowerRatings (for Traders) stocks that are moving toward “bargain” territory for those traders looking for stocks that are in position to move higher.
The two stocks are Martek BioSciences
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PowerRating) and Wynn Resorts
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PowerRating), both with trader’s PowerRatings of 8. The bullish screens that picked up these stocks used the Relative Strength Index and consecutive lower lows, respectively in order to spot potential opportunity in these names.
First, the Relative Strength Index indicator. The screen involving the RSI has us look for stocks with a 2-period Relative Strength Index that is under two. The Relative Strength Index is a technical indicator widely used by chartists, and is an effective way of determining whether or not a stock is overbought or oversold. Overbought is a form of shorthand to describe a market that in which virtually everyone who can or wants to bid on a stock has already done so. Oversold refers to the opposite; a situation when just about all those who want to and are able to sell a stock have already sold. The RSI measures overbought and oversold conditions by moving higher as markets become more overbought and moving lower as markets become more oversold.
Buying weakness means looking for oversold stocks. And when using the RSI, oversold stocks are those that have a particularly low Relative Strength Index reading. Thus, we look for stocks with an RSI that is less than two (Relative Strength Index values range from 100 for a maximum overbought market to zero for a maximum oversold market).
There was one key adjustment to the traditional RSI that we made. Historically, traders have used a 14-period RSI. Our research suggests that for traders operating in the typically short timeframe of roughly three to five days, a 14-day RSI is simply too long. To that end, we discovered that a 2-period RSI was much more appropriate and the results of our research have so far borne that out.
To learn more about the TradingMarkets approach to trading with the 2-period RSI, click
here.
The other TradingMarkets Stock Indicator that produced at least one high, PowerRating
stock was the
5+ Consecutive Lower Lows indicator. That stock, again, was Wynn Resorts.
Given our approach to tradingââ”