Short Term Trading Strategies That Work: Overbought Yahoo, Oversold O’Reilly

Two of the stocks noted in Monday’s “Short Term Trading Strategies That Work” column, 7
Stocks You Need to Know, provided excellent examples of the high probability approach to short term trading at work.

We noted ^YHOO^ on Monday as one of a number of stocks that had become overbought below the 200-day moving average.
Our research into short term stock price behavior going back more than a decade shows that stocks under their 200-day moving averages tend to underperform stocks trading above their 200-day moving averages.

This edge is at the foundation of our trading philosophy: only buy stocks trading above the 200-day moving average. Avoid or sell short stocks trading below their 200-day moving averages.

The reversal to the downside in Yahoo is an example of this principle in action. After becoming overbought below the 200-day moving average, the odds were increasing that the stock would

underperform. From their last overbought close on Monday, shares of Yahoo are down well over 3%.

Also on Monday we spotted an oversold stock, ^ORLY^ trading above its 200-day moving average. For short term traders who had been looking for trades to the long side, the potential for an oversold rally in ORLY likely had the stock on many a high probability trader’s watchlist.

After closing lower for six out of the past eight sessions, shares of O’Reilly Automotive were up well over 1% late in trading on Thursday. Short term traders who used intraday weakness to pick up shares of the stock at the lowest possible levels were the biggest beneficiaries of the stock’s oversold reversal to the upside.

A few things are worth remembering here. The first is that having a philosophy of trading can be a critical component in trading consistency and success. Our philosophy of only buying stocks for short term trades when they are trading above their 200-day moving averages and only selling short stocks when they are trading below their 200-day moving averages is what makes it possible for

traders to be trading both on the long side and on the short side at the same time. It’s all a matter of the location of the individual
stock: above the 200-day moving average? Potential buy.

Below the 200-day? Avoid, or potential short sell.

Second, stock trading strategies that use intraday weakness in order to get the lowest possible prices during pullbacks (or the highest possible prices during an overbought bounce) will help short term traders get the most out of their high probability trades. To learn more about how to trade stocks using intraday weakness, click
here to read:
“Intraday Weakness and Scaling-In: Two Greatest Secrets of High Probability Trading.”)

School’s in session! The Fall 2010 Swing Trading College is a complete training program that provides short term traders with everything they need to know in order to professionally swing trade

offered by TradingMarkets. Click
here to find out why in a free, online presentation on the Fall 2010 Swing Trading College.

David Penn is Editor in Chief at TradingMarkets.com.