Smart Traders Treat Sell-Offs Like Sales: VRGY, TWLL, SYNA, RAS, NETL
With the markets selling off with force again on Wednesday, our lists are replete with stocks in pullback mode, creating numerous opportunities for traders who buy short term weakness in otherwise strong stocks.
It still comes as a bit of surprise to me sometimes — after a day when the Dow sells off by more than 200 points — to find stocks like those in today’s report. These are stocks that have pulled back, but are far from falling apart.
This is a key distinction. Stocks that are still trading above their 200-day moving average have statistically different behavior compared to those stocks that are trading below their 200-day moving averages. When stocks below their 200-day moving averages sell off, traders are best advised to get out of their way — or enjoin the move by selling short. The territory below the 200-day moving average is a veritable badlands as far as stocks are concerned.
Above the 200-day moving average, however, it is important to give stocks the benefit of the doubt. Statistically, we have found that among this group of stocks are many — if not most — that traders can buy on dips and corrections, no matter how sharp those corrections may be. Stocks trading above the 200-day moving average — as are all five of the stocks in today’s report — will tend to keep moving higher, making buy-the-pullback strategies worthwhile.
Let’s take a look at the stocks:
Verigy Ltd.
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VRGY |
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PowerRating) Short Term PowerRating 9. RSI(2): 3.28
Techwell Inc.
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PowerRating) Short Term PowerRating 9. RSI(2): 8.99
Synaptics Inc.
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PowerRating) Short Term PowerRating 9. RSI(2): 15.35
Rait Financial Trust
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RAS |
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PowerRating) Short Term PowerRating 9. RSI(2): 2.90
Netlogic Microsystems Inc.
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NETL |
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PowerRating) Short Term PowerRating 9. RSI(2): 9.11
Of the five stocks in today’s report, the two that stand out are Verigy Ltd. and Rait Financial Trust. Because all five stocks share the same high Short Term PowerRating, the second key criteria to look for is the 2-period Relative Strength Index. Here, we are looking for the lowest scores. The RSI measures how overbought or oversold a stock is, with lower scores representing more oversold. Because we want to find stocks that have too many sellers and not enough buyers, we want the most oversold stocks. These are the stocks with the lowest RSI.
Stocks with PowerRatings of 9, but 2-period RSIs of more than 10 are stocks to be watched but not necessarily traded immediately. Often, for example, today’s 9-rated stocks with Relative Strength Index values in the teens often become tomorrow’s 10-rated stocks with single digit RSIs.
Note finally that all five stocks have Short Term PowerRatings of 9. Our research, which involved millions of simulated short term stock trades between 1995 and 2007, indicated that stocks with Short Term PowerRatings of 9 outperformed the average stock by a margin of more than 13 to 1 after five days.
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