One of the best times to take advantage of short-term oversold conditions is when those conditions develop in the wake of traders and investors taking profits from markets that have just made major, long-term highs. In these situations, as we often point out in 7 Stocks You Need to Know, are often custom-made for swing traders and more active investors, who can take advantage of short-term volatility by buying markets after they have sold off and then selling them into strength as they rally back.
Achillion Pharmaceuticals (NASDAQ: ACHN) provided traders with two excellent opportunities to do just this so far in 2012. The first came in mid-January, as a five-day pullback led to both major ratings upgrades (i.e., two days with top 10 ratings), as well as a one-day bounce of more than 15%.
The second opportunity arrived just under a month later in February, as the stock began to pullback after rallying to test 2012 highs set in mid-January. As before, the sell-off earned ACHN significant ratings upgrades. And when those upgrades reached 9 out of 10, a level where the edges are typically strong enough to encourage even the most conservative swing traders to make their move, traders were able to take advantage of intraday entry strategies to take a longposition in ACHN near its lowest and least expensive levels in weeks.
And while the stock did dip even lower shortly after traders were able to take long positions, additional buyers did not take very long to return to the market for shares of ACHN. Six days after traders were able to buy weakness in ACHN in the first half of February, the stock was closing sharply higher, gapping up and bolting above its short-term moving average. Those who took profits at the end of this big-one day move were able to lock in gains of as much as 16%.
PowerRatings help identify the kind of stocks that have pulled back to levels where traders have historically come off the sidelines more interested in buying than selling. Combined with tools and tactics like intraday entries, that allow traders to take positions in stocks on an intraday basis with carefully placed limit orders, and dynamics exits that ensure that traders are always selling positions into strength (which can actually result in positive slippage over time), PowerRatings are a great way for swing traders and active investors to eliminate the noise and the spin of the stock market and instead to focus on areas of true potential value and opportunity.
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David Penn is Editor in Chief of TradingMarkets.com