How to Trade Overbought Stocks
Each day,
TradingMarkets publishes
7 Trading Ideas for Today, a selection of stocks from our daily indicators. TradingMarkets
Stock Indicators are based upon our latest quantitative research, and
highlight trading edges backed by our database of more than 7-million historical
simulated trades.
On Friday,
March 9, International Asset Holdings
(
IAAC |
Quote |
Chart |
News |
PowerRating) was
the candidate from the
Stocks Up 10% or More
list.
These are stocks that have
gained 10% or more over the past five days and are trading below their 200-day
moving average. Our research shows that stocks trading below their 200-day
moving average that have gained 10% or more over the past five days have shown
negative returns, on average, 1-week later. Historically, these stocks have
provided traders with a significant edge.
The
TradingMarkets mantra is to “buy weakness, sell strength,” and that is exactly what you could
have done here. While everyone in the media was touting that the market had
rebounded, our
research shows that these types of overbought conditions create a bearish edge for
stocks.
1-day later, IAAC declined –2.1%
2-days later, IAAC declined -4.0%.
5-days later, IAAC had declined -4.0%.
This is an example of an edge
that took less than the full 5 days to unfold. On the 4th day of the
trade, IAAC opened up at 18.00, which the stock then rallied from to close up on
the 5th day at 19.00. From the open of the trade to the low, the stock
moved 9.1%, before bouncing back on oversold conditions on the 5th day.
Obviously,
results like these do not occur every time, but
our quantified research clearly shows that the edges exist during extreme
oversold or overbought conditions.
Check out our
latest quantified research articles
here. If
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click here
for a free 7-day trial. Check back daily for more 7 Trading Ideas for Today,
and develop your own watchlist of stocks with historically-backed edges.
John Lee
Associate Editor