How PowerRatings can help you find short entries

  • August 2, 2006
  • Darren Wong

The most successful money managers have always used contrarian
strategies to take money from the markets.  Examples include buying when
the majority are selling, shorting breakouts, buying short-term weakness in an
uptrend.  I would like to show you how our


PowerRatings can be used for current market
conditions. 

We are sitting near the top of the recent trading range
(Dow
10,700 – 11,260) going back to the end of May.  From the recent rise there
must be a lot of positive sentiment from investors, which sets us up for a
coming downward move.  Let’s take a look at how we can use


PowerRatings
to find potential short positions. 

First we will concentrate on stocks with
PowerRatings of 1, 2, or 3.  Stocks with a PowerRating of 1, 2, or 3 have
underperformed the
S&P 500 over the next five-days. The 1’s have performed 4.9 times worse than the
S&P 500, the 2’s have performed worse than the S&P 500, and the 3’s have only
managed 90% of the S&P 500 performance.  This data was tested over the 10
year period of 1995-2005. 

Here is the current list of 1’s and 2’s:

To further filter the above list for potential shorts, we
should consider only the selections under their 200-day
moving average. 
Having the price below the 200-day shows major weakness in the stock and
confirms that it is in a downtrend. 

Please note that the list of 1’s and 2’s are not
to be used as automatic shorts.  There are a wide variety of factors that
may influence the stock price such as company announcements, earnings, etc. 
Detailed research should be done before taking any positions and always set your
stops upon entering any trade.  Also, shorting stocks are not for everyone. 
But they can be very useful in certain situations. 

I hope that this article will help add to your
trading arsenal. 

Darren Wong

Associate Editor

darrenw@tradingmarkets.com

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