Bear Market Rallies and Short Term PowerRatings: Tips for Swing Traders
Stocks were strong in the hour after Treasury Secretary Paulson announced a temporary, partial nationalization of a number of major U.S. banks, including JP Morgan, Goldman Sachs, Citigroup, Bank of America and Morgan Stanley.
JP Morgan
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PowerRating) Short Term PowerRating 5. RSI(2): 72.62
Interestingly, the Dow has lost all of its premarket gains since the opening bell and have actually slipped into the red.
Goldman Sachs
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PowerRating) Short Term PowerRating 5. RSI(2): 68.52
On Monday before the market opened, our Top 25 PowerRatings stocks consisted of eight, 10-rated stocks and eight, 9-rated stocks – with the balance having Short Term PowerRatings of 8. As of this morning before the open, there were no 10-rated stocks and only one, 9-rated stock in the Top 25.
Citigroup
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PowerRating) Short Term PowerRating 4. RSI(2): 76.16
Although we have not found a statistically sound correlation, I have noticed anecdotally that when the number of top rated stocks in our Top 25 is low, the likelihood of attractive trading candidates is slight. This morning, for example, only two stocks in our Top 25 PowerRatings stocks were trading above their 200-day moving average.
Bank of America
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PowerRating) Short Term PowerRating 4. RSI(2): 63.48
Between what we are seeing in the Top 25 PowerRatings and what we are seeing in the stock charts, it is beginning to look as if traders are taking a “buy the rumor, sell the fact” attitude toward this morning’s historic Treasury announcement. It is no surprise that there might be a significant amount of profit-taking the day after the Dow industrials rally by more than 11%. But given the near-universal support among economists and market watchers given the move today by the Paulson treasury, traders could be forgiven for wondering what a reversal on Turnaround Tuesday might do to those bullish sentiments that were in such abundant supply on Monday.
Morgan Stanley
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PowerRating) Short Term PowerRating 5. RSI(2): 73.96
One thing I have pointed out consistently is that in bear markets, stocks will tend to become overbought very quickly. And while sooner or later, an overbought market will become more overbought, break through the 200-day moving average and keep going (or, more often, pull back to the 200-day moving average, “testing it for support” in the parlance of traditional technical analysis” and then resume its move higher), every time BEFORE that happens will be a profit-taking – or short selling – opportunity for swing traders.
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David Penn is Editor in Chief at TradingMarkets.com.