The Beginning of the Bounce? Tips for Swing Traders
Stocks responded positively on Friday after increasingly aggressive selling took the markets to their most oversold levels since mid-October.
It is true that markets that are strong will get stronger and markets that are weak will tend to get weaker. This is what trends are all about and I have talked about this aspect of markets regularly over the past several days.
But it is also true that the more extreme a market moves in one direction, the greater the likelihood that there will be a reaction — however short-lived, in some instances — in the other direction.
This is the essence of how we trade with Short Term PowerRatings. Our Short Term PowerRatings spot instances when strong stocks and ETFs make extreme moves to the downside, becoming very oversold and, according to our research going back to 1995, often excellent short term trading candidates to the long side. Divided into categories of 1 through 10, the highest Short Term PowerRatings stocks and ETFs, have outperformed the average stock by a margin of nearly 17 to 1 after five days.
The move higher on Friday was the beginning of the sort of move that will cause weak stocks to show atypical strength. Our discipline says that these moves higher are not to taken at face value and, in some instances, may even be profitably speculated against. These are the stocks with low Short Term PowerRatings of 1 or 1, which have historically underperformed the average stock according to our research.
We will take a closer look at these opportunities in the coming days — either in the form of stocks with low Short Term PowerRatings or, as we have in the past, inverse exchange-tradeded funds with high Short Term PowerRatings. Both are likely to be worth additional attention by swing traders looking to take short term advantage of the current volatility.
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