While the “gift” of 20/20 hindsight is what often encourages traders to begin questioning their exit strategies (“if only I’d stayed in the position another day …”), when it comes to entries, impatience is often the challenge to be overcome (“what if I miss the move?”)
The recent pullback in shares of building materials company USG Corporation (NYSE: USG) was another good example of how this patience can be put to the test. Shares of USG began earning top, “consider buying” ratings on the final day of March. By then, the stock had falled for six out of the previous eight trading days, following a rally to new, 52-week highs.
For very aggressive traders, a “consider buying” rating of 8 out of 10, which USG earned, would be enough to initiate a trade on the long side. But more conservative traders, traders who are truly looking to maximize the edges revealed through PowerRatings, were more likely to wait and see if the stock could earn a further upgrade and, beyond that, follow-through even lower the day after that upgrade.
This is the kind of selling that distinguishes a significant, oversold opportunity in the markets from a garden-variety pullback. Stocks rise and fall every day in the stock market. What high probability trading is all about, is finding – and fading – only the extreme conditions: the stock that has rallied “too far, too fast” and is ripe for a short-term reversal.
In the case of USG, conservative traders got their wish as the stock traded lower, earning a one-point ratings upgrade to 9 out of 10 just two days after USG’s initial boost into “consider buying” territory. And one day later, with the stock again earning a 9 out of 10 rating AND following through to the downside, traders and active investors were able to take positions in USG Corporation at a level significantly below where the stock was when it first appeared on the radar with its 8 out of 10 rating.
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As always, we look for an intraday entry level at least 3% below the previous close (here, an intraday entry that was as much as 4% below the previous close would have allowed traders to pick up the oversold shares). And five days later, USG has rallied into strength, closing above its 5-day moving average. This move provided traders who had bought the stock on weakness to sell for a gain of more than two and a half percent – depending on entry level.
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