3 Top Pullbacks for Traders
When stocks are soaring, it can be hard for traders to start thinking about stocks pulling back. But pullbacks are always and everywhere the treasures that savvy stock traders should seek, whether the broad markets is showing strength or weakness.
With today’s better than expected jobs report, stocks shot out of the gate Friday morning, with the Dow rallying more than 100 points in the first hour of trading before settling back. Whether or not this strength will continue, it is just the kind of market action that can distract short term stock trader from the task at hand: finding strong stocks that are moving lower.
Although the broader market sets the tone for stocks, there will still be a number of stocks zigging while the broader market zags. And even among those stocks that do move higher in sympathy with the broader market can find their gains pared back as those fortunate enough to have taken positions previously look to lock in gains and take some–or all–of their profits off the table.
While we encourage traders to look for stock that are down–even on days when the markets are rallying–we want to make sure that traders stick with those stocks that are trading above their 200-day moving averages. Our research into short term stock price behavior says that stocks that are trading above their 200-day moving averages are much more likely to respond to oversold conditions–the kind of conditions that accompany significant pullbacks–by moving higher compared to stocks that are trading below their 200-day moving averages.
This is all the more important when the broader market is under pressure and trading below its 200-day moving average.
So when reviewing high Short Term PowerRatings stocks, the kind of stocks our research suggests are likely to outperform the average stock in the short term, make sure that you further screen those stocks not only to pick the highest rated stocks (the 9s and the 10s), but also to make sure that those stocks are trading above their 200-day moving averages. A quick check like this as you are reviewing potential trade candidates can go a long way toward ensuring that the stocks you trade have every possible edge in terms of being able to move higher in a relatively short period of time.
In addition to trading above their 200-day moving averages, all three stocks in today’s reports have Short Term PowerRatings of 9. Our research, involving millions and millions of simulated stock trades between 1995 and 2007, indicates that stocks with Short Term PowerRatings of 9 have outperformed the average stock by a margin of more than 13 to 1 within five days.
Note also the 2-period Relative Strength Index values accompanying each stock. We consider stocks with 2-period RSIs of less than 10 to be oversold, with stocks having 2-period RSIs of less than 2 being extremely oversold and often warranting particular attention.
Permian Basin Royalty Trust
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PBT |
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PowerRating) Short Term PowerRating 9. RSI(2): 6.87
HCP Inc.
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HCP |
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PowerRating) Short Term PowerRating 9. RSI(2): 39.86
First Advantage
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FADV |
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PowerRating) Short Term PowerRating 9. RSI(2): 11.49
There are five things that every successful short term stock trader knows about trading markets like these. We have published all five in a new, special report called “5 Secrets to Short Term Stock Trading Success” now available for free. Learn what key factors are involved in turning mediocre speculators into professional-grade, short-term stock traders–and how our Short Term PowerRatings can play a part. Click here for your free report–or call us today at 888-484-8220.
David Penn is Senior Editor at TradingMarkets.com.