PowerRatings and RSI Trading Strategies: WNR, EW, GMCR
Stocks are hovering around break-even levels after the first hour of trading on Tuesday.
What happens to stocks in the short term? They say that, in the long term, the stock market is weighing machine. But in the short term, stocks are far more vulnerable to the emotional swings of greed and fear, emotional swings that can temporarily override what might be truly positive or negative fundamentals.
Western Refining Inc.
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PowerRating) Short Term PowerRating 9. RSI(2): 1.59
In fact, it could be said that this battle – the struggle between emotional feeling and objective reality – that makes trading not only profitable, but possible in the first place. One person thinks prices are likely to rise. Another thinks prices are likely to fall. If the two parties can agree on an exchange price, then a trade is born.
What is the best way to take advantage of greed and fear in the short term when it comes to a stock or ETF trading strategy? Our research indicates that the 2-period RSI, a shorter term variation on Welles Wilder’s popular and widely used Relative Strength Index, is perhaps the best indicator for gauging these short term extremes.
Edwards Life Sciences
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PowerRating) Short Term PowerRatng 9. RSI(2): 1.94
An overbought 2-period RSI, for example, reflects a surplus of buying pressure and rising sentiments of greed and complacency to the notion of prices moving lower. This means that we can use overbought reading in the 2-period RSI to alert us to instances when stocks or ETFs may have moved too far too fast to the upside.
An oversold 2-period RSI, by contrast, reveals an excess of selling pressure. This lets us know that fear is increasingly the dominant emotion in the marketplace. Moreover, as that fear becomes more extreme (and markets more oversold), it becomes all the more likely that fear and panic will begin to cloud the thinking of traders, encouraging them to abandon often sound trading strategies and exit positions just to end the pain of loss.
Green Mountain Coffee Roasters
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GMCR |
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PowerRating) Short Term PowerRating 8. RSI(2): 0.74
For us, however, as high probability traders, extreme oversold conditions are not a cause for panic but are instead a potential opportunity to trade stocks and ETFs to the long side.
When it comes to stocks, we like to see true extremes reached before we consider taking action. For us, a stock with a 2-period RSI of more than 98 is considered overbought while a 2-period RSI of less than 2 is considered extremely oversold. These are the levels that traders looking to buy or sell short high Short Term PowerRatings stocks should be watching.
Remember that the biggest edges, according to our research into short term stock price behavior, are found when the biggest extremes develop. Be patient and wait for the right stocks to come to you.
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.
David Penn is Editor in Chief at TradingMarkets.com.