How to use PowerRatings to become a better short-seller

  • March 22, 2006
  • John Emery

You may have seen my previous articles on using products
that have a statistical edge to assist you with making money as a trader.  Let
me give you a quick review of what I mean.  If a trading pattern or a trading
situation can be mathematically quantified, then this quantified situation can
be backtested over years of past data.  The backtesting will provide solid proof
that the situation provided a higher percentage of wins than would a random
selection of a stock.  All we now know it that the situation worked in the
past.  Let me stress again, there are no guarantees that the situation will work
in the future.  We certainly hope they will, but again nobody can guarantee that
the quantified situation will provide an edge today.

 

With
that said, I have had good success using PowerRatings and the predisposition the
rating system provides.  If a stock is rated as a 3 it has higher probability of
falling in price over the next 5 days, than a stock rated with a higher number. 

 

A
situation I used to my trading advantage on Monday morning was something I found
in the scan of the S&P 500 stocks on Friday night.  I usually look for stocks
that are rated 3 or lower for possible shorts and 8 or higher for possible
longs.  There were no stocks in the S&P 500 scan that had a rating of 8 or
higher.  There were a group of stocks that were rated 3 or lower.  Out of this
group, I noticed that 5 housing stocks were rated 3 or lower.  Lennar
(
LEN |
Quote |
Chart |
News |
PowerRating),
Centex
(
CTX |
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PowerRating), D.R.Horton
(
DHI |
Quote |
Chart |
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PowerRating), Pulte Homes
(
PHM |
Quote |
Chart |
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PowerRating), and KB Homes
(
KBH |
Quote |
Chart |
News |
PowerRating).  
The stocks had similar patterns when I looked at them over the weekend.  On a 15
minute chart the 20 and 34 period moving averages were close together and on
several the prices were below both moving averages.  I chose to trade LEN and
KBH out of the group.  I did not want to try and manage 5 positions on a
daytrade basis. 

 

 

 

 

So how
did the trade work?  The stocks did not sell off immediately.  Rather both KBH
and LEN formed wide range bars for the first 2 bars.  I sold short near the top
of the range with a stop if the price exceeded the range.  I came close during a
couple of pushes up on the NYSE Tick, but the price never reached my stop.  I
was rewarded with a break out below the bottom of the range.  On both KBH and
LEN, I booked good profits mid morning when the surge of selling slowed down. 
The only mistake I made was to not keep a partial position for the next day
(Tuesday) as a swing trade.  I forget that the PowerRatings concept has a 5 day
bias.  The next time I encounter a group of sector stocks with the same rating,
I will take some of my position with an options position and hold for a longer
period.

 

 

I would
not have found this trade without PowerRatings to alert me to the situation
because I have been more focused on a possible sell off in the in the energy
sector.  I am never one to turn a good setup down.  When stocks in a sector are
all situated in a short term downtrend, it adds strength to the possibility of a
downturn and sell off. 

 

John
Emery