PowerRatings Chartology: 3 Stocks for Swing Traders
After three days of gains in the S&P 500 and the Dow industrials, stocks are selling off somewhat in the first few hours of trading on Friday.
Swing traders will be little surprised by this development. The essence of swing trading, as far as we are concerned, is in tracking the market’s movement from oversold extreme to overbought extreme and back again. Our research into short term stock price behavior reveals this to be the true “motion” of the stock market “ocean.” And successful navigation of these waters is at the center of successful swing trading.
For us, Short Term PowerRatings are like a compass to assist in this navigation. Low Short Term PowerRatings warn us about markets that are overbought and overextended to the upside. High Short Term PowerRatings alert us to markets that are oversold and overextended to the downside. As we will see in this edition of PowerRatings Chartology, Short Term PowerRatings provide powerful signals of when potential opportunity has appeared in the markets – whether that opportunity leads to buying a stock, exiting a stock, or selling a stock short.
Let’s take a look at a PowerRatings chart of our first stock in today’s report: Valeant Pharmaceuticals International
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PowerRating). VRX has a Short Term PowerRating of 8 and a 2-period RSI of 7.74 as of Thursday’s close and 6.14 as of this writing on Friday morning.
Valeant Pharmaceuticals International had been moving higher over the course of July before earning a Short Term PowerRating downgrade from 6 to 4 to 2 over the end of last week. This PowerRating downgrade served a number of purposes: (1) to alert traders who were long VRX that it may be a good time to exit and (2) to signal to traders who buy pullbacks that an opportunity to buy a quality pullback may be in the offing.
The pullback in VRX came swiftly afterwards in the form of a session that opened above the previous session’s highs and closed beneath that session’s lows.
An example of what often happens on the other side of pullbacks that create Short Term PowerRatings of 8 can be found in the PowerRatings chart of Big Lots Inc.
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PowerRating).
BIG has a 2-period RSI of 10.95 as of Thursday’s close and 17.79 in the first hour of trading Friday morning. But what I want to draw your attention to is the last time Big Lots earned a Short Term PowerRating of 8 as a result of a pullback. This was in the first half of July, when the stock plunged by 3.86 points in a single session.
While a number of traders were likely panicking at that development, it is worth noting that the session created an 8-rated stock. Closing at $27.13 on July 14, the stock was closing at more than $30 within three days.
The last stock I want to show you is Cubist Pharmaceuticals Inc.
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PowerRating), which also has a Short Term PowerRating of 8.
In some ways the PowerRatings chart of Cubist Pharmaceuticals represents aspect of what was clear in both Valeant Pharmaceuticals and Big Lots. For one, we can see how the low Short Term PowerRatings anticipated the short, 8-rated pullback from July 24 through July 28th. Second we can see how the stock responded to that 8-rated pullback. Within three days of CBST’s 8-rated close at $21.25 on July 28th, the stock was closing at $22.66 en route to a high of $24 by mid-August.
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David Penn is Editor-in-Chief at TradingMarkets.com.