PowerRatings Chartology: 3 Overbought Stocks for Swing Traders
After the first few hours of trading on an options expiration Friday, stocks are flat to slightly lower.
Most of the time in our PowerRatings Chartology column, we focus on how high Short Term PowerRatigns help traders spot quality pullback opportunities in stocks trading above their 200-day moving averages.
Of late, I have been pointing out how low Short Term PowerRatings can be used with the same stocks that are trading above their 200-day moving averages to help trader anticipate potential pullbacks before they happen. This use of low Short Term PowerRatings not only helps traders spot pullbacks, but they also reveal opportunities for traders to take profits before stocks start to retreat.
Delta Airlines Inc.
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DAL |
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PowerRating) Short Term PowerRatings 3. RSI(2): 99.05
Swing Traders, however, can also use low Short Term PowerRatings with stocks that are trading below their 200-day moving averages. These stocks are the weak stocks that, for one reason or another, have encouraged traders to feel more optimistic (or greedy) toward these equities than circumstances objectively warrant.
This is the same sort of contradiction that we see in buying opportunities — only in reverse. Here, we are looking at stocks that are weak, trading below their 200-day moving averages, but are rallying and becoming increasingly overbought. Our statistical studies suggest that these rallies, more often than not, are unsustainable and prone to reversal.
What our low Short Term PowerRatings do is help indicate to traders when these unsustainable levels have been reached. And in the same way that the highest Short Term PowerRatings indicate the best potential buying opportunities, the lowest Short Term PowerRatings underscore the best potential short selling opportunities.
Continental Airlines
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CAL |
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PowerRating) Short Term PowerRatings 3. RSI(2): 97.47
Of the three stocks in today’s report, two have Short Term PowerRatings of 3 and one has a Short Term PowerRating of 2. Our research, involving millions of simulated short term stock trades between 1995 and 2007, indicate that stocks with Short Term PowerRatings of 3 or less tend to underperform the average stock after five days.
UAL Corporation
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UAUA |
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PowerRating) Short Term PowerRatings 2. RSI(2): 99.31
Additionally, both DAL and UAUA have 2-period RSI values of more than 98. We found that stocks with 2-period RSIs of more than 98 have produced negative returns in one-day and one-week timeframes. CAL, along with DAL, has also been up by 10% or more in the past five days. This, too, has indicated the likelihood of underperformance 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.
David Penn is Editor in Chief at TradingMarkets.com.