Trading the Big Pullbacks
Stocks sold off again on Wednesday with the Dow industrials losing ground for six consecutive days.
It should go without saying that the major markets are extremely oversold. The 2-period RSI of the S&P 500, for example, is at its lowest point since late October 2008.
And as the trend traders will tell us, oversold markets can become all the more oversold.
This is when it is especially difficult for mean reversion traders to step into the fire, take aim and execute trades to the long side. Many traders prefer to sit out such markets as too tough to trade, waiting for less volatility and clearer-cut opportunities.
For traders who follow our Short Term PowerRatings, however, the number of quality pullback opportunities is slowly increasing. As of the Wednesday close, the number of 9-rated stocks has doubled from the previous close. While still outnumbered by 8-rated stocks in our Top 25 PowerRatings Stocks roster, the appearance of greater numbers of 9-rated stocks tells us that a growing number of stocks are entering a “consider buying†zone that traders should be aware of.
When selling gets particularly aggressive and pullbacks all the more sharp, it becomes worthwhile for traders to wait for the deepest, most severe pullbacks before taking positions to the upside. These pullbacks, more often than not, will be found in the highest rated Short Term PowerRatings stocks, such as those with PowerRatings of at least 9. These stocks are the ones that, according to our research into short term stock price behavior since 1995, are likely to outperform the average stock by a margin of more than 13 to 1 after five days.
Remember, the bigger the stretch, the bigger the bounce. Stick with the highest Short Term PowerRatings stocks that have reached the deepest oversold extremes and take advantage of one of the bigger edges available for short term stock traders.
Does your stock trading need a tune-up? Our highest Short Term PowerRatings stocks have outperformed the average stock by a margin of nearly 17 to 1 after five days.
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