PowerRatings Danger Zone: 3 Stocks for Traders to Avoid

When markets that are trading below their 200-day moving averages begin moving higher, savvy traders know that many of those stocks entering rally mode are not as attractive as they appear.

The excitement that can build as a trader sees a stock that has been “down so long” that it looks like “up” is the only place to go can be almost palpable at times. Traders who would turn up their noses at the idea of buying stocks that have fallen 10% or more from their recent highs will often knock each other over for the opportunity to bet on stocks that are up 10% or more from recent lows.

As you might imagine, we consider this approach to trading backwards. Stocks coming off new highs that make short term lows are, according to our research, among the best stocks for short term traders. And those stocks that have started to move higher after only recently scuttling along their lows are stocks that, according to our work on short term stock price behavior, short term traders should either avoid or sell short.

Let’s take a look at three such stocks. All three of these stocks have been selected based on their low Short Term PowerRatings of 2 or less, as well as the fact that all three have experienced five or more consecutive highs. This combination – low Short Term PowerRating and five or more consecutive highs – has been one of the more effective ones for short term traders looking to place wagers against stocks.

Alaska Communications Systems
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Short Term PowerRating 2. RSI(2): 99.95.

Alaska Communications Systems ascent in recent days has been accompanied by a dramatic decrease in the stock’s Short Term PowerRating from 5 in the first half of May to 2 in the second half. Most recently, ALSK gapped higher, helping drive the stock’s 2-period RSI even deeper into extreme overbought territory.

Hologic Inc.
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Short Term PowerRating 2. RSI(2): 99.65.

We can’t promise that Hologic’s response to its currently low Short Term PowerRatings will be explosive as the last time Hologic’s Short Term PowerRatings slipped to 3 or lower. But the stock’s collapse in late April shortly after its Short Term PowerRating slid from 5 to 3 is still illustrative of the anticipatory nature of our PowerRatings.

Hologic actually had a Short Term PowerRating of 8 back on May 16. But as this stock, which is trading below its 200-day moving average, has moved higher, its Short Term PowerRating has steadily moved lower.

Supertex Inc.
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Short Term PowerRating 1. RSI(2): 99.15.

For virtually the entire month of May, Supertex has been moving higher from far below its 200-day moving average. And for virtually the entire month, Supertex’s Short Term PowerRating has moved lower and lower and lower.

As of this writing, Supertex Inc. has earned our lowest Short Term PowerRating of 1. Stocks with Short Term PowerRatings of 1, it should be pointed out, have underperformed the average stock by a margin of nearly 5 to 1 after five days. And, as I noted earlier, the fact that this 1-rated stock has both a 2-period RSI of more than 99 and has been up for more than five consecutive days suggests strongly that Supertex is not a stock for traders or investors to be betting on to continue to move higher.

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.

Click here to start your free, 7-day trial to our Short Term PowerRatings!

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 Senior Editor for TradingMarkets.com.