Stock’s One Constant & 3 PowerRatings Stocks
Once in motion, an object will remain in motion unless acted upon by an outside force. This basic principle of physics can be applied to the stock market.
Price will fall until it reaches the point where investors consider it a bargain. At this time, the force of the bargain buyers will reverse the fall by applying the force of buying, which in turn causes shares to climb. This is the one constant of the stock market. Weakness is bought and strength is sold.
The question has always been, just how weak is weak enough to trigger the buying? In addition, what is the fine line that could indicate the stock will not attract buyers regardless?
We conducted extensive research to quantify this “buying the dips” observation so that it could be used to provide a trading edge. What we found was quite astonishing.
Here is the results of the study, remember, all the names were trading above their 200-day Simple Moving Average. This moving average is the fine line that differentiates stocks that will likely bounce to those that potentially will continue the down trend.
Stocks that closed down exactly three consecutive days, on average, outperformed the benchmark 1-week later (+0.36%).
Stocks that closed down exactly four consecutive days, on average, outperformed the benchmark 1-week later (+0.54%).
Stocks that closed down exactly five consecutive days, on average, outperformed the benchmark 1-week later (+0.63%).
Stocks that closed down exactly six consecutive days, on average, outperformed the benchmark 1-week later (+0.82%).
Stocks that closed down exactly seven consecutive days, on average, outperformed the benchmark 1-week later (+1.06%).
As you can see, there is significant edge in buying stocks that have fallen 5 or more days in a row. The odds become even greater for a short term bounce when you combine PowerRatings greater than 8 and a RSI(2) lower than 2.
Here are 3 stocks that may help you make the most of their pullbacks:
^APPA^
^CRY^
^SCSS^
Learn more strategies for trading stocks in the short term with a free trial to our PowerRatings! The highest rated stocks have outperformed the average stock by a margin of more than 14.7 to 1 after five days! Click here to launch your free PowerRatings trial today!
David Goodboy is Vice President of Business Development for a New York City based multi-strategy fund.