Bounding into the Overbought: Swing Traders on Standby
Stocks rallied more than 6% in both the Nasdaq and S&P 500 Index on Monday as traders covered short positions and bottom-pickers rushed in to pick up still-discounted shares.
Monday’s bullishness helped drive a number of stocks higher into overbought territory. If this action continues, with buyers able to crowd out sellers, then we should see an increase of low Short Term PowerRatings stocks — indicating increased overbought markets for different stocks — as well as, eventually, more high Short Term PowerRatings stocks, as traders take profits on stocks that had been advancing over the past few days, bringing those stocks lower.
What makes a strong stock weak? Certainly weakness or bearishness in the broader market can bring even good stocks lower. But it is worth remembering that sell-offs in strong stocks are a natural part of the process as traders and investors enter and exit positions.
Many of the stocks that appear on our high Short Term PowerRatings list are stocks that a few days or a few weeks ago, were at relative highs. These are stocks that have been doing well for their investors and traders, by and large, in recent memory. The selling we initially see in these stocks is a function of that, merely profit-taking.
But each successive wave of selling brings the stock that much closer to the point at which the stock is actually undervalued. Traders, fearing that something must be wrong and forgetting often that selling often just represents successful traders taking their money off the table, can exacerbate this undervaluation by selling further and pushing stocks into oversold extreme territory.
This is when and how many stocks get their high Short Term PowerRatings — courtesy of smart traders who bought low taking profits and not-so-smart traders who bought into the advance late and then find themselves scrambling out of positions in an effort to keep whatever more modest gains they may have left.
As it is we are only a few more up days away from what are likely to be a wealth of short signals. I am seeing a high number of inverse and leveraged inverse ETFs with Short Term PowerRatings of 7. That’s not quite good enough for us to begin taking positions in these names. But it is a sign that moment is drawing near.
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