5 PowerRatings Pullbacks for Traders

A sell-off to start Tuesday means that a number of stocks that looked attractive before the open are looking increasingly attractive a few hours into the trading day.

A market that is down by more than 100 points within the first hour of trading is not a market that most traders look forward to. But for traders who know the rewards of buying strong stocks as they move lower, a sell-off in the markets can be as welcome as rain after days of drought.

Think about it: often we see some stock soaring higher day after day after day. Many times that stock is part of a sector that is very much in demand, such as the precious metals stocks were early this year and energy stocks were more recently. “Wow,” we often find ourselves thinking. “It would have been great to have bought this stock when it was lower.”

This is great thinking in most ways. Traders rarely get into as much trouble as they do when they start buying stocks that have already made big moves. This tendency to chase stocks is one of the biggest challenges confronting traders – even veteran traders – when greed overtakes good sense

But the problem with this thinking is that when these high-flying, too hot too handle stocks that used to grace the covers of business and investment magazines finally do start to move lower – sometimes sharper – many of those traders who were longing for those stocks once upon a time now no longer want anything to do with them.

“Wow, look at how hard those (fill in the blank) stocks got hit!”
go those same traders. “Those stocks are getting crushed. I don’t want to go anywhere near that sector right now!”

You can see the conundrum: if you won’t buy them when they are up (often a smart decision, by the way), and won’t buy them when they are down, just when are you supposed to buy them?

We believe the best way to own stocks that have moved up significantly is to buy them when they are down significantly. While other traders seek to buy high and sell higher, we prefer to stick to a discipline of buying strong stocks, stocks that are trading above their 200-day moving averages, after they have moved lower – and the lower the better. Our research indicates that buying stocks on pullback can result in not only higher numbers of winning trades, but also lower, less severe drawdowns in those trades that do not work.

All five stocks in today’s report hail from the Nasdaq, and have Short Term PowerRatings of 8 or 9. We found that stocks with Short Term PowerRatings of 8 outperformed the average stock after five days by a margin of more than 8 to 1. Stocks with Short Term PowerRatings of 9 were even more impressive against the average stock, beating the average stock by a margin of more than 13 to 1 after five days.

Note also the 2-period Relative Strength Index values accompanying each stock. We consider a 2-period RSI of less than 10 to represent an oversold market, with values of less than 2 representing an extremely oversold condition often warranting immediate attention from traders looking to buy strong stocks on temporary weakness.

Savient Pharmaceuticals
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Short Term PowerRating 9. RSI(2): 7.24

II-VI Inc.
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IIVI |
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Short Term PowerRating 9. RSI(2): 2.59

Ultimate Software Group
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ULTI |
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Short Term PowerRating 8. RSI(2): 9.53

Psychiatric Solutions
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Short Term PowerRating 8.
RSI(2): 8.45

Pozen Inc.
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Short Term PowerRating 8. RSI(2): 7.62

Does your stock trading need a tune-up? Our highest Short Term PowerRatings stocks have outperformed the average stock by a margin of nearly 17 to 1 after five days.

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Whether you have a trading strategy of your own that could use a boost or are looking for a way to tell the stocks that will move higher in the short term from the stocks that are more likely to disappoint, our Short Term PowerRatings are based on more than a decade of quantified, backtested simulated stock trades involving millions of stocks between 1995 and 2007. Click the link above or call us at 888-484-8220, extension 1, and start your free trial today.

David Penn is Senior Editor of TradingMarkets.com.