Swing Trading with PowerRatings: Model Trade of the Week in Ista Pharmaceuticals

This week’s Model Trade of the Week takes a look at how swing traders can use PowerRatings to find the best stocks to sell short.

With the stock market down big again on Thursday, more and more traders are looking for ways to take advantage of these sharp declines. Selling stocks short is a key strategy for swing traders, and fits in well with the quantified “buying the selling” swing trading paradigm.

The only difference is that instead of buying the selling and selling the buying, selling stocks short as a swing trader means “selling short the buying and buying back the selling.”

Recent price action in ^ISTA^ provides us with a good example of these principles at work.

Shares of ISTA had been trading below the 200-day moving average since late July. Not only was ISTA trading below the 200-day, where statistics tell us stocks have tended to underperform, but on Tuesday the stock climbed to the edge of overbought territory, earning a PowerRatings downgrade to 2.

This was a signal to traders using PowerRatings that ISTA was (a) vulnerable to a short-term reversal, and (b) even more vulnerable to a short-term reversal if the stock continued higher on an intraday basis the following day.

Not only did ISTA follow-through to the upside on Wednesday, but the stock also earned a further PowerRatings downgrade to 1, our lowest PowerRatings grade. This meant that, historically speaking, the odds that ISTA would experience a near-term reversal had grown.

ISTA chart

A trader using a 3% intraday entry level – a limit order 3% above the stock’s close – after ISTA’s upgrade to PowerRatings of 2 would have been able to take a short position on that day when ISTA earned its downgrade to 1.

By the way, traders can use intraday entry levels from as aggressive as 2% to as conservative as 7%. More aggressive intraday entries will lead to more frequent trades with a somewhat lower accuracy rate. More conservative intraday entries will lead to less frequent trades and higher accuracy rates. Where you set your intraday entry level is up to you.

In the case of Ista Phamaceuticals, a 3% intraday entry would have a trader short ISTA at 5.15 as of the close on Wednesday. And while the market has not yet closed on Thursday, shares of ISTA are already trading below their 5-day moving average (our basic exit signal), having fallen by well over 10% in a day.

For more information on swing trading stocks using PowerRatings, click here.

David Penn is Editor in Chief of TradingMarkets.com