How to Use TradingMarkets New Indicators
Over the past two months we have shared some of our latest
research findings with you (view archives).
We have also been working on a new set of indicators that allow you to implement our research
every day. This article is the first in a series teaching you how to use the new
TradingMarkets Stock Indicators. Link
These new indicators scan the market every day in order to help you find the
best trading opportunities. There are ten bullish and ten bearish indicators,
each one varying in size depending on market conditions. The results should not
be viewed as a list of stocks to buy and sell. Instead, you should view them as
a short list of potential trades.
While each indicator is different, the philosophy behind them is simple, and
based on our statistical studies of short-term market behavior. Our research has
shown, time and again, that it is better to be a buyer of short-term weakness
and a seller of short-term strength. These indicators are all designed to help
you implement that philosophy.
Here’s a look at the list of stocks with a “2-Period RSI Above 98†for 01/22/07
and how you could use it:
These are stocks that have a 2-day RSI reading above 98 and
are trading below their 200-day moving average. Our research
shows that stocks trading below their 200-day moving average with a 2-period RSI
reading above 98 have shown
negative returns, on average, 1-day and 1-week later. Historically, these
stocks have provided traders with a significant
edge. To learn more about our research into stocks that have a 2-period RSI
above 98, and how to use this information,
As you can see, the list contains nineteen stocks. All of
these stocks are considered short-term overbought, as measured by the 2-period
RSI. That means, if you already have a long position in any of these stocks, now
may be a good time to lock in profits. Aggressive traders may even consider
short selling some of these stocks.
There are a number of additional categories included on the list —
PowerRatings, RSI, Historical Volatility and ADX. Each of these categories
provides useful information that can improve your edge.
We already know that combining PowerRatings with this research improves the
results. Bearing that in mind, eight of the nineteen stocks don’t qualify for
PowerRatings, and three of those eight don’t qualify for a historical volatility
reading. The reason why eight stocks don’t qualify for PowerRatings is because
they are recent IPO’s. If we remove these eight from the initial list we now have eleven
potential stocks to trade.
Of the remaining eleven stocks, two have PowerRatings of 4 (which has
historically meant out performance versus the S&P 500 over the next five days).
Since we are looking for potential short selling candidates we want to focus on
stocks displaying signs of historical under performance. Therefore, removing these two
stocks shortens our list even further.
The short list now stands at nine, and eight of them have PowerRatings of 3,
while one has a PowerRating of 1. This lone stock deserves an even closer look
as it has displayed recent price action historically led to underperformance versus the S&P 500 over the next five days.
A closer look reveals Neurocrine Biosciences
(
NBIX |
Quote |
Chart |
News |
PowerRating) has a high
historical volatility reading and a very high ADX reading. These two readings
provide even more information. The HV reading tells us we are looking at a very
volatile stock — a good sign, as we don’t want to misallocate our trading capital into
stocks unlikely to move. The very high ADX reading tells us this stock is
trending but in an extreme manner — something our research tells us is unlikely
to be sustained.
Now by combining all of this information we have been able to find a high
probability setup. Does that mean we have found a sure thing? Absolutely not!
But the odds are in our favor, making this a trade worth consideration. We could
either sell short NBIX, or implement an options strategy to take advantage of a
potential fall in NBIX’s share price.
To access this list every day, along with all the other
bullish and bearish indicators, click here for a free trial.
Link to signup page
Please send me any questions or comments you may have regarding
this article.
Ashton Dorkins is
Editor-in-Chief of TradingMarkets.com