PowerRatings Danger Zone: 3 Stocks for Traders to Avoid
body>
With stocks increasingly under pressure and the markets early in June already testing their May lows, there may not be a better time to look for stocks that have rallied too far too fast in this overall bearish climate.
Successful swing trading boils down to two things: buying dips in strong stocks and selling bounces in weak stocks. The only question for the trader is two-fold: how do we know what a strong stock or a weak stock looks like? And how do we known when a stock has dipped or bounced enough?
We answer the first question with a very simple and straightforward tool: the 200-day moving average. Our research indicates that stocks above their 200-day moving averages tend to act differently from those stocks that are trading below their 200-day moving averages. Stocks above the 200-day moving average tend to recover and move higher after pulling back. Stocks below the 200-day moving average tend to have a bias to the downside, and rallies in these stocks are often suspect.
So we generally refer to stocks above the 200-day moving average as strong, and stocks below the 200-day moving average as weak.
That answers the what. How do we answer the when?
Our Short Term PowerRatings are one way for traders to know when to say when. Because of the edges we have seen in our historical testing, we know that certain stocks — stocks with high Short Term PowerRatings — are likely to beat the average stock over the next five to eight days. So when we find these stocks trading above their 200-day moving averages, we know that an opportunity to the upside exists.
Similarly when we spot stocks with low Short Term PowerRatings trading below the 200-day moving average, we know that we have the combination of “the what” and “the when” that creates the moment when a trader can feel confident in taking a position — in this case, against the stock.
All three stocks in today’s report have Short Term PowerRatings of 1. This rating is the lowest one a stock can get, reflecting a strong likelihood that the stock will underperform the average stock.
Specifically, we found that stocks with Short Term PowerRatings of 1 have actually lagged the average stock by a margin of nearly 5 to 1. For traders eager to make wagers against stocks, stocks with PowerRatings of 1 should be among those focused on.
Note also that all three stocks have 2-period Relative Strength Index values greater than 99. We consider any stock with a 2-period RSI of more than 90 to be overbought, with those stocks with 2-period RSIs of more than 98 being extremely overbought and often warranting serious attention from short term traders.
Genesco Inc.
(
GCO |
Quote |
Chart |
News |
PowerRating) Short Term PowerRating 1. RSI(2): 99.72
Jabil Circuit Inc.
(
JBL |
Quote |
Chart |
News |
PowerRating) Short Term PowerRating 1. RSI(2): 99.46
Western Refining Inc.
(
WNR |
Quote |
Chart |
News |
PowerRating) Short Term PowerRating 1. RSI(2): 99.94