4 Too Hot To Handle Stocks for Traders
When markets are trading below their 200-day moving averages, short-term stock traders should be as ready to bet against stocks as they are ready to buy them.
Using the 200-day moving average as a filter makes trading decisions for short-term traders more straightforward, if not easier. When the markets are in a truly bullish mode, for example, trading above their 200-day moving averages, short-term traders can maintain a bias to the buy side. That includes individual stocks with high Short Term PowerRatings that may still be trading below their 200-day moving averages.
However, when markets are struggling and trading below their 200-day moving averages, short-term traders can benefit by moving from a long bias to a more neutral bias. This neutral bias means that traders will still look to buy high Short Term PowerRatings stocks, but only if those stocks are trading above their 200-day moving averages. By trading above their 200-day moving averages, stocks are signaling that they are among the stronger stocks in the market at the time. They are also telling traders that they are the stocks most likely to move higher, farther when their corrections run their course.
But what this neutral bias also means is that traders should look for stocks that are overextended not just to the downside but to the upside, as well. When markets are struggling, the likelihood increases that certain stocks–stocks that are below their 200-day moving averages and are moving higher, making consecutive news highs or up big in a short period of time–are suspect and vulnerable to reversal.
The stocks I wanted to highlight today are part of this latter group of stocks that may be prone to correction due to their suspicious upward movement in recent days. This price movement is “suspicious” because we know that when stocks that are trading below their 200-day moving averages begin to move higher, the odds are that those advances will tend to fail.
This has been borne out by our quantitative research which has noted, for example, that stocks that have experienced five or more consecutive higher highs AND that are also trading below their 200-day moving averages are stocks that traders should avoid or, if they are open to selling stocks short, bet against. We have found through an analysis of millions of short-term stock trades that stocks in this condition have actually underperformed the average stock in one-day, two-day and one-week timeframes.
Click here to read our research into trading stocks that have made five or more consecutive higher highs.
These are the stocks that traders should pay attention to when markets are under pressure and trading below their 200-day moving averages. These are the stocks that will provide opportunity to short-term traders when opportunities to trade stocks to the long side grow few.
All four of the stocks in today’s report have Short Term PowerRatings of 2. This puts all four in that class of stocks that has tended to dramatically underperform the average stock over the next five days. All of these stocks also have 2-period Relative Strength Index values of 95 or more, revealing them to be significantly overbought. The individual RSI values are noted below.
Blackboard
(
BBBB |
Quote |
Chart |
News |
PowerRating). RSI(2): 98.64
KBW
(
KBW |
Quote |
Chart |
News |
PowerRating). RSI(2) 98.99
Casella Waste Systems
(
CWST |
Quote |
Chart |
News |
PowerRating)., RSI(2) 99.16
Dealertrack Holdings
(
TRAK |
Quote |
Chart |
News |
PowerRating). RSI(2) 98.12
Does your stock trading need a tune-up? Read our special, Free Report, “5 Secrets to Short Term Stock Trading Success” for a refresher course on not just why to buy low and sell high, but specifically how you can use intraday weakness in the market to do so. Click here to get your copy of “5 Secrets to Short Term Stock Trading Success” or call us today at 888-484-8220.
David Penn is Senior Editor at TradingMarkets.com.