Oversold? Down Big? Four Stocks with Upside for Traders
In the game of buying low and selling high, the first step — buying weakness
— is often the hardest part.
Why kid ourselves? Weak stocks do not look good. Even though the kind of weakness we look for as stock traders is weakness-in-strength, to the untrained eye, this sort of weakness looks as bad as any other form of weakness in the market. Stocks off their highs… quality names falling day after day
— sometimes sharply… bad news often flocking to the stock like pigeons to a
park bench…
But this is precisely when traders need to be putting their buying hats on. To be sure, when markets have slipped below the 200-day moving average, the terrain for traders is often more treacherous.
This is because weakness is likely to be more widespread, creating both additional opportunities and additional dangers for traders looking to buy weakness.
Back in the fall of 2007, Larry Connors, CEO of TradingMarkets, outlined five mistakes traders make when trading stocks below their 200-day moving averages. That article would be well worth reading again for traders today. And one of the most important points in Connor’s article can be found in the first line: avoid buying stocks that are trading below their 200-day moving average.
Click here
to read Larry’s advice on trading and the 200-day moving average.
This step alone can save traders a tremendous amount of heartache.
While it is weakness we encourage traders to purchase, that weakness is only buyable when it comes in the context of strength. And strength, from a trading perspective, comes from stocks that are trading above their 200-day moving average.
Once this is established, traders can use a variety of different indicators to gauge weakness. I have made no secret of my love for the 2-period RSI, which Connors and TradingMarkets editor-in-chief Ashton Dorkins wrote about a little over a year ago. The 2-period RSI is an excellent gauge for spotting short-term oversold markets that are likely to bounce in the near term.
Click here
to learn about trading with the 2-period RSI.
As effective as the 2-period RSI can be alone as a screen for finding oversold stock opportunities, using the indicator in concert with other indicators can help traders narrow down a list of candidates to an even more discriminating set of opportunities. After getting a list of oversold stocks with 2-period RSI values below 2, I compared it to a list of stocks that were also down 10% or more. Combining those lists gave me a set of four stocks, all with PowerRatings (for
Traders) of 9, which stand a good chance of surprising traders to the upside.
Alpha Natural Resources
(
ANR |
Quote |
Chart |
News |
PowerRating). RSI 1.19.
100-day H.V. 44.51
BioScrip
(
BIOS |
Quote |
Chart |
News |
PowerRating). RSI 1.64. 100-day H.V. 48.34
Team, Inc.
(
TISI |
Quote |
Chart |
News |
PowerRating). RSI 1.48. 100-day H.V. 54.35
TradeStation
(
TRAD |
Quote |
Chart |
News |
PowerRating). RSI 0.94. 100-H.V. 39.06
As an example of how PowerRatings
— and the TradingMarkets Approach to Trading — work to buy low and sell high, consider this PowerRatings chart of ANR. Notice how the market was moving sideways throughout December, giving the stock average PowerRatings of 5 and 6. ANR “broke out” late in the month, but rather than that move increasing the PowerRating of the stock, the move higher actually made the stock temporarily less attractive as a trading candidate.
As the stock has moved lower, become cheaper, in late December and into January, however, the PowerRating of the stock has increased significantly. We can see this both through the actual PowerRating number in the price panel of the chart, as well as in the PowerRatings Oscillator, which indicates when a stock moves into the 8 or higher “green zone” where stocks are seen as attractive trading or investment candidates. This graphically displays how strong stocks
— and ANR is trading above its 50-day moving average as well as its 200-day moving average
— become cheaper and more attractive to traders as the stocks “come in” or move lower.
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