PowerRatings and the Art of Trading Higher Highs
Stocks shot out of the gate with a bang on Tuesday, with the Dow industrials up more than 200 points within the first hour of trading.
Traditionally, it is the period leading into Labor Day Weekend that tends to have bullish portents. But traders were eager to buy – or cover short sales – as soon as the opening bell sounded this morning, sending stocks soaring to start the week.
Going into trading today, the most interesting sector was clearly the financials. Most of these stocks are weak stocks, trading below their 200-day moving averages. At the same time, many financial stocks – including names like Bank of America
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PowerRating) and Citigroup
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PowerRating) – have advanced for four days in a row. This combination: stocks under their 200-day moving averages that are up for four days in a row – and perhaps five if this morning’s gains hold – is one that we have found more likely to produce negative returns in the short term than positive ones.
Specifically, I am referring to research we conducted looking at millions of simulated short term stock trades between 1995 and 2007. Among our discoveries was the fact that stocks that were trading below their 200-day moving average and were up for five or more consecutive days produced negative returns in one-day, two-day and one-week timeframes.
Click here to read our research into stocks that have advanced for five or more consecutive days.
With the market shifting toward the overbought, many of the stocks that had high Short Term PowerRatings as of Friday’s close are rallying and are no longer as oversold as they were. This also means they are less attractive as trading candidates to the long side. That said, here are a few of the more oversold, high Short Term PowerRatings stocks that more aggressive traders may want to consider.
China Precision Steel
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PowerRating) Short Term PowerRating 8. RSI(2): 20.06
Pioneer Drilling Company
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PowerRating) Short Term PowerRating 8. RSI(2): 5.20
Grupo Simec S.A.
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PowerRating) Short Term PowerRating 8. RSI(2): 3.95
Triquint Semiconductor
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PowerRating) Short Term PowerRating 8. RSI(2): 5.65
Quaker Chemical Corporation
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PowerRating) Short Term PowerRating 8. RSI(2): 4.39
All five stocks in today’s report have Short Term PowerRatings of 8. Our research indicates that 8-rated stocks have outperformed the average stock by a margin of more than 8 to 1 after five days.
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David Penn is Editor-in-Chief at TradingMarkets.com.