Up, Up…Stay Away? Four Bearish Bounces for Traders

January 29, 2008
David Penn

Traders are never more bullish than when stocks are moving higher day after day after day. But don’t let these the buyers in these stocks lull you into complacency. These names may be ripe for reversal.

One of the TradingMarkets
Stock Indicators that continues to provide potential trading opportunities is the “5+ Consecutive Up Days” indicator I wrote about on Monday (“What Goes Up: Six Overbought Stocks for Traders”). Yesterday’s close brought a whole new batch of these stocks that have seen buyers bid them up in session after session. As we noted, however, stocks that experience multiple up days or sessions consecutively are increasingly vulnerable to correction and, when these stocks are trading below their 200-day moving averages, are often just the kind of stocks that traders looking for opportunities on the short side can exploit.

The beauty of shorting the stocks in today’s discussion that have experienced several consecutive up days is that these stocks are generally in a weak condition to begin with. This means it is more natural for these stocks, trading below their 200-day moving averages, to move lower as opposed to higher. While greedy traders see weak stocks rallying from lows and think only of the money that can be made if the stocks continue to move higher, more rational, professional traders know that little good happens to stocks below the 200-day moving average, and that any strength in stocks at that level is suspect and often profitably faded as the weakness that had characterized the stock before its bounce returns–sometimes with a vengeance.

Click here
to read our research into stocks experiencing consecutive up (or down) sessions.

There is a certain simplicity to the notion that stocks that are moving higher will continue to move higher and stocks that are moving lower will continue to move lower. However, our research suggests strongly that stocks do not act like objects floating around in physics experiments. Instead, looking at millions of trades between
1995 and 2006, we discovered that stocks that experienced as few as three or four consecutive up days or sessions underperformed their benchmarks after one week. And as the number of consecutive up days or session increased, so did the underperformance. Stocks with five or more consecutive up sessions, based on our research, produced negative returns of 0.11% after a week’s time, on average. This makes these stocks ones to avoid for most traders, and stocks to short for more aggressive traders.

All four of the stocks listed in today’s discussion not only have experience 5 or more consecutive up days, but also these stocks have short-term PowerRatings of 1. This makes these among the least attractive stocks for traders looking for upside–but among the most attractive stocks for traders looking to wager to the downside. I have also included the 2-period RSI values for each stock, to help traders isolate those stocks that might be most overextended and vulnerable to reversal. The 100-day historical volatility or HV(100) is also noted.
The 100-day historical volatility is a measure of the variability of the stock’s price, with higher HV(100) values being more sought after by short-term traders who are looking for the potential for more price movement in less time.

Ameristar Casinos
(
ASCA |
Quote |
Chart |
News |
PowerRating). RSI(2): 94.59.
HV(100): 44.43