5 Nasdaq Pullbacks for Traders: NWPX, NUVA, NFLX, JAKK, ISRG
Does weakness in the Nasdaq mean opportunity for these five Nasdaq stocks? Their high Short Term PowerRatings say “yes.”
The Nasdaq pulled back on Tuesday after five consecutive days of higher closes. While this short term rally no doubt kindled the bullish spirits of many traders, the fact that the Nasdaq remains below its 200-day moving average makes us more likely to want to bet against–rather than wager for–the Nasdaq as a whole.
But from a short term trader’s perspective, the weakness in the Nasdaq seems to have helped a number of high-flying Nasdaq stocks begin or extend pullbacks. Looking at our list of Top Stocks after the Tuesday close, we see five stocks in particular that have made the sort of pullbacks that buyers of weakness look for as markets correct.
Remember, there are actually two pullbacks we look for in stocks that we are interested in buying. This is because it is of paramount importance that we buy on weakness not on strength. Our research–and experience as traders–has shown us time and time again that the lower we are able to buy strong stocks when they pull back, the greater the rewards when those stocks end their pullbacks and resume their upward trends.
The first pullback then is the most important one. It is the one in which a stock that has stretched far above its 200-day moving average starts to experience profit-taking. While this is a normal–if not necessary–process, it tends to lead to two things: premature short selling and panic selling by weak holders, often those who joined the rally late.
Both of these groups contribute to turning what often begin as mild pullbacks into sharper, more extreme pullbacks. Remember, often all that has happened in these stocks is that those who bought them in the past are taking some profits. Yet many traders–and the financial media–often treat these profit-taking pullbacks as a sign of trouble in the stock.
This trouble, of course, is what provides opportunity for swing traders who like to buy weakness.
The second pullback occurs after we have targeted a stock as a potential buy. Here, we are looking for what we call “intraday weakness”. Intraday weakness means that after we have found our candidate, we want additional selling to lower the price of the stock further. Generally, for example, we will look to enter a stock anywhere from 2% to as much as 8% below the previous close–again, looking for that additional pullback, that intraday weakness, to help us get into the stock as the lowest level possible.
Again, our research and experience trading stocks short term backs up this approach. Many times, as subscribers to our TradingMarkets Battle Plan for Stocks have seen for themselves, we are able to enter a stock shortly after the open and exit the stock at the close (or at the open of the following day) because of the low level at which we were able to take a position by waiting for intraday weakness.
When combined with stocks that have high Short Term PowerRatings, such as the five stocks in today’s report, this strategy of waiting for the “two pullbacks” can be a much more profitable approach to trading swings in the market than chasing breakouts or attempting to buy high and sell higher.
In addition, all five stocks in today’s report have Short Term PowerRatings of 8. Our research, which examined millions of simulated stock trades between 1995 and 2007, indicated that stocks that had Short Term PowerRatings of 8 outperformed the average stock by a margin of more than 8 to 1.
Note also the 2-period Relative Strength Index values accompanying each stock. We use the 2-period RSI as a way of determining whether stocks have an excess of buying (overbought) or an excess of selling (oversold). With regard to the five Nasdaq stocks pulling back right now, we are looking for low, oversold 2-period RSI values under 10 or, preferably, as low as 2.
Northwest Pipe
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NWPX |
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PowerRating). RSI(2): 1.73
Nuvasive
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NUVA |
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PowerRating). RSI(2): 54.72
Netflix
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NFLX |
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PowerRating). RSI(2): 5.65
Jakks Pacific
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JAKK |
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PowerRating). RSI(2): 2.72
Intuitive Surgical
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ISRG |
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PowerRating). RSI(2): 4.10
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David Penn is Senior Editor at TradingMarkets.com.