The 10% Down Rule: 2 PowerRatings Companies
Despite the wildly overbought conditions, the stock market keeps surging higher. The oracle, Warren Buffett, has stated that the credit crisis is over while the VIX fear index is in a steep decline. 83% of the S&P 500 companies have reported earnings that have beat estimates. Combining what appears to be strengthening internals with the continued government stimulus is a recipe for a rocketing bull market through the end of the year. Of course, this is barring any external shock factors or unknown bearish future events.
It seems like one can just blindly buy any stock during times like these and profit. Well, our studies, since 1995 have clearly shown that stocks that have fallen 10% or more but are still above their 200-day simple moving average are much more likely to outperform than those that have recently climbed.
Remember, what you see on the chart is the past; it’s too late to profit from any moves that you can observe as they already occurred. Therefore, one needs to anticipate what’s going to happen by using what has happened time and time again in the past as a guide when choosing stocks. The 10% decline buy rule works since the smart money is looking for bargains in the midst of the raging bull market. No one wants to overpay for something, and buying stocks off by 10%, plus yet still in a long term uptrend, as shown by the 200-day simple moving average certainly fits the criteria of a bargain.
After locating the stocks that fit the 10% down rule, we then drill deeper only looking at shares that have a RSI(2) of less than 2. (click here for an explanation on RSI(2) indicator). The next step in making sure the odds are solidly on your side for a short-term bounce is eliminate all stocks from this list, except those with a PowerRatings of 8 or above. The stocks you are left with have proven time and time again to outperform over the 1 day, 2 day and 1 week timeframes.
Here are 2 stocks fitting all the above criteria for your short-term consideration:
Pacific Sunwear of CA
(
PSUN |
Quote |
Chart |
News |
PowerRating)
Electro-Optical Sciences
(
MELA |
Quote |
Chart |
News |
PowerRating)
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 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.