Some of last year’s biggest winners have been selling off over the past several weeks and providing potential buying opportunities. Questcor Pharmaceuticals (NASDAQ: QCOR) is the latest stock to pull back after recording large gains in the bull market. QCOR gained more than 1,800% since 2008 and more than doubled last year.
The company derives almost all of its sales from a single drug that is used to treat multiple sclerosis. This week, a research firm raised questions about the quality of the drug being produced and QCOR fell more than 23% from Monday’s close to Friday’s close. The stock will head into trading next week with a PowerRatings of 10.
PowerRatings are based on the relative strength or weakness of particular stocks or ETFs. The higher the rating, the greater the one week historical gain has been for stocks and ETFs with that rating. For best results, enter trades on stocks with a PowerRatings of 8 or higher with a limit order 3-7% below the previous day’s closing price. Higher % limit entries have historically shown a greater percentage of winning trades but higher % limit orders also reduce the chance of trade execution.
In the past, buying stocks with a rating of 10 on a 3% pullback the next day and selling five days later has been profitable 75% of the time. The average winner has gained 5.9%. Other entries and exits also show high winning percentages and large average gains.
TradingMarkets Analytics provides access to indicators including ConnorsRSI and historical volatility along with information about average returns for different time periods. In the chart below, we can see than the four-day loss in QCOR is more than two standard deviations below the average four-day performance.
QCOR is a volatile stock with a 100-day historical volatility of 56.23, five times the level of volatility for SPDR S&P 500 ETF (NYSE: SPY). Volatile stocks make excellent short-term trading candidates because they can deliver large moves in a short amount of time.
At TradingMarkets Analytics we can also see that QCOR is oversold with a ConnorsRSI reading of 5.38. A trading strategy based on persistent weakness in ConnorsRSI is detailed in The Advanced ConnorsRSI Trading Strategy for ETFs. In back-testing, entering trades on a 3% pullback after the setup has been completed delivered an average gain of 6.89% and had a winning percentage of 84.67%. These trades are closed when the ETF closes above its five-day moving average. QCOR meets the setup conditions for this strategy and should be considered a buy on additional weakness.
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All data is as of the end of day on 2/28/2014.