PowerRatings and Relative Strength: The High Low of Stock Trading
When it comes to short term stock trading, one combination is hard to beat: high Short Term PowerRatings and low 2-period Relative Strength Index values. In other words, if you find a top-rated stock with a bottom-basement RSI in the middle of the road — buy it!
Our research into short term stock price behavior, research that involved millions of simulated short term stock trades between 1995 and 2007, allowed us to divide and rate stocks based on their likelihood of outperforming the average stock in the short term traders’ “sweet spot” of 5 to 8 days.
Every key characteristic — volume, momentum, trend and volatility — was factored in and tested for the role it plays in driving stocks in the short term. How important was volume? When was momentum most powerful? How do we measure the trend? How much of a role does historical volatility play over short periods of time?
All of these factors — and more — were used to develop a rating system for stocks, of which the highest rated showed clear historic outperformance over the average stock after five days.
Specifically, we found that stocks with our highest Short Term PowerRating of 10 outperformed the average stock by a margin of nearly 17 to 1 after five days in our testing. Stocks with Short Term PowerRatings of 9 beat the average stock after five days by more than 13 to 1, and 8-rated stocks managed to outperform the average stock by a margin of more than 8 to 1 over the same time frame.
So what does Relative Strength have to do with anything?
If PowerRatings represents the “high” side of the trade — with traders knowing that higher Short Term PowerRatings stocks will provide an edge over the average stock — then Relative Strength represents the “low” — as in low RSIs and very oversold markets.
If we want Short Term PowerRatings to be as high as possible, then we also want RSIs — particularly the 2-period RSI which is our favorite — to be as low as possible. If a stock is considered generally oversold when its 2-period RSI is less than 10, then we are looking for stocks with 2-period RSIs of 2 — or less — when trying to find the kind of oversold stocks that often make for the best trades to the upside.
Let’s take a look at a few stocks that, as of Friday’s close, are displaying the sort of high-low in the form of high Short Term PowerRatings and low, 2-period RSIs that we want to find in quality buying candidates.
Avant Immunotherapeutics Inc.
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AVAN |
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PowerRating) Short Term PowerRating 10. RSI(2): 4.23
McMoran Exploration Company
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PowerRating) Short Term PowerRating 9. RSI(2): 4.69
Abraxas Petroleum Corp
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ABP |
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PowerRating) Short Term PowerRating 9. RSI(2): 5.78
WSI Industries Inc.
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WSCI |
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PowerRating) Short Term PowerRating 8. RSI(2): 7.87
Verigy Ltd.
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PowerRating) Short Term PowerRating 8. RSI(2): 14.34
Of the five stocks in today’s report, the most attractive are clearly Avant Immunotherapeutics and McMoran Exploration Company. Avant is perhaps a bit more appealing with its top-rating of 10. But both stocks have the requisite “high-low†combination of high Short Term PowerRating and low, 2-period RSI that our research has shown to be a winning combination for traders looking for outperformance in the short term.
Does your stock trading need a tune-up? Our highest Short Term PowerRatings stocks have outperformed the average stock by a margin of nearly 17 to 1 after five days.
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Whether you have a trading strategy of your own that could use a boost or are looking for a way to tell the stocks that will move higher in the short term from the stocks that are more likely to disappoint, our Short Term PowerRatings are based on more than a decade of quantified, backtested simulated stock trades involving millions of stocks between 1995 and 2007. Click the link above or call us at 888-484-8220, extension 1, and start your free trial today.