3 Underdog Stocks for Traders: ABMD, TKC, TIVO

March 7, 2008
David Penn

When the going for stocks gets tough, the tough traders get going with lists of buy candidates.

Most traders recognize the importance of buying low and selling high–at least in theory. But when you tell traders that buying low and selling high often means stepping in to buy after markets have fallen by 2-3% in a single session, or after stocks have fallen by 10% or more in a few days, there are many who begin to shy away from the time-tested discipline of buying weakness and selling strength.

This is perfectly understandable. Traders are never more courageous than when markets are moving higher session after session. And when markets are falling, a great many traders–often against their better judgement–can’t help but want to either rush for the exits or even join in the piling on by selling stocks short themselves.

But this is how the psychology of the “common man (or woman)” can be hazardous to the health of the great trader he or she wants to be. The trick to trading stocks, particularly short-term trading of stocks, is to already own the stock before it starts its major move higher. And the only way to be sure of catching a stock before it begins moving dramatically higher is to buy that stock when it is moving lower.

One of the key ways we identify the kinds of stocks we think are good opportunities to the long side is to look for stocks that, while trading above their 200-day moving averages, have been down by 10% or more in the past five days. These are stocks that have performed well in the recent past–as evidenced by their trading above their 200-day moving average. Yet in spite of this solid performance–or sometimes because of it–these stocks have come under selling pressure.

Click here
to read our research into trading stocks that are down big in a short period of time.

The 200-day moving average filter is also important–especially when the broader markets are trading below their 200-day moving averages. We want strong stocks that are pulling back, not weak stocks that may be on their way to truly breaking down. We have found the 200-day moving average to be an effective “line in the sand” separating the stocks that are more likely to move higher from the stocks that are more likely to move lower.

All three of the stocks presented here have Short Term PowerRatings of 8. This means that all three belong to that class of stocks which, according to our research, have outperformed the average stock by more than 8 to 1 over the next five days. I have also noted the 2-period Relative Strength Index values for each stock so that traders can have another indicator of the degree of selling pressure each stock is experiencing.

Abiomed
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ABMD |
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PowerRating). RSI(2) 1.16