Of the 100 stocks of the S&P 100, fully 10 have pulled back into oversold territory above the 200-day moving average. Seven of those stocks are included in today’s “Short Term Trading Strategies That
Work: 7 Stocks You Need to Know” column.
Our research into short term stock price behavior reveals two things that are crucial for high probability trading in stocks in the short term.
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1. Only buy stocks trading above their 200-day moving averages.
Going back to 1995, the average stock has had a 5-day gain of 0.28% when trading above the 200-day moving average. Below the 200-day moving average, the average 5-day gain drops to 0.18%.
2. Buy stocks after they have made short term lows, not after short term highs.
Again, going back to 1995, the average 5-day performance of stocks after making a five-day high is 0.14%. For stocks that have made a 5-day low, the average return is 0.44%
These are the kind of edges that can only be revealed by a rigorous quantitative analysis of millions of equity trades going back decades.
And it is by combining these quantified edges that we are able to create the kind of high probability trading strategies that have characterized Larry Connors and TradingMarkets research for more than a decade.
here to find out more about our research into short term stock price behavior in the book by Larry Connors and Cesar Alvarez, Short Term Trading Strategies That Work.
Now let’s look at some stocks.
Shares of American Express have closed lower for the past three consecutive trading days, and are again in oversold territory above the 200-day moving average. Recent pullbacks into oversold territory above the 200-day have resulted in significant, short term, oversold bounces in AXP, particularly in early July and early August.
After spending the last half of July climbing higher into overbought territory, shares of ConocoPhillips have been in pullback mode for most of August.
Oversold above the 200-day, COP has closed lower for four days in a row leading into Monday’s session.
At their most oversold levels since June and down three days in a row are shares of Walt Disney Company.
Recent pullbacks in the stock have been relatively shallow compared to the oversold pullback in late June, which briefly took the stock below the 200-day. DIS is as oversold currently as it was during the late June sell-off.
The last time shares of Ford Motor Company were this oversold was in late June, shortly before rallying from below $10 to above $13 by late July.
Ford’s current pullback represents at least in part profit-taking from that advance – and a potential opportunity in the short term for traders looking to buy oversold stocks above the 200-day moving average.
IBM is trading only a few cents above its 200-day moving average.
But the stock remains among the more oversold of those in the S&P 100 and as such should be on the trading radar of short term traders using high probability trading strategies of buying weakness above the 200-day.
Nike closed down for four days in a row going into Monday’s trading, with sellers especially aggressive to end the week.
The selling in NKE has put the stock at its most oversold levels of the summer.
Trading at its lowest levels since late May, shares of UPS are again in oversold territory above the 200-day moving average. Even with the stock’s recent pullback, UPS is still trading higher than it has for most of the summer.
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David Penn is Editor in Chief at TradingMarkets.com.