Buying the Oversold, Selling the Overbought: 2 Simple Rules for Swing Traders
Stocks responded to Monday’s exceptional decline with a fairly exceptional oversold rally on Tuesday. The S&P 500 closed up more than 5%, with the Nasdaq only a few basis points behind.
The only people who don’t think this is a tough market are those who aren’t trading it. We have seen in our own work stocks that did all the right things but still failed to become trades that were as profitable as we would have liked.
But what has heartened us are the large number of people who trade as we do — buying stocks as they pull back and selling them into strength when demand for them resumes — who are up for the year and trading well.
This is all the more apparent during times when many traders are struggling. Often when markets are under pressure and trading gains harder to come by, we tend to think that there are those out there who are simply smarter than the rest of us, who have more resources or more connections, who are making all the money. But the fact of the matter is that there are professionals who are hurting as badly as the average end-of-day retail trader whose trading has fallen on hard times.
We have no idea what the markets will bring over the next few weeks — or days. But what we know is how stocks have behaved over the past several years, going back to 1995, at least. And that is for stocks to move back and forth, over time, between being oversold and out of favor to being overbought and highly in demand.Â
This is the motion that is true in both bull and bear markets, whether stocks are hitting new highs or oscillating back and forth between two seemingly impenetrable locations. It is at the basis of our approach to trading. And when we combine these two rules of buying the oversold and selling the overbought with the historical edges in our high Short Term PowerRatings stocks, the results have been ones that — given this tough market — we are more than happy to live with.
Jo-Ann Stores Inc.
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PowerRating) Short Term PowerRating 9. RSI(2): 0.516
Cryolife Inc.
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PowerRating) Short Term PowerRating 9. RSI(2): 4.71
Capitol Bancorp Ltd.
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PowerRating) Short Term PowerRating 9. RSI(2): 8.50
Axsys Technologies Inc.
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PowerRating) Short Term PowerRating 8. RSI(2): 11.18
True Religion Apparel Inc.
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PowerRating) Short Term PowerRating 8. RSI(2): 6.81
Of the five stocks in today’s report, three have Short Term PowerRatings of 9 and two have Short Term PowerRatings of 8. Our research into short term stock price behavior, reviewing millions of simulated trades between 1995 and 2007, indicate that stocks with Short Term PowerRatings of 8 outperformed the average stock by a margin of more than 8 to 1 after five days. Stocks with Short Term PowerRatings of 9 beat the average stock by a margin of more than 13 to 1 over the same timeframe.
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.