TradingMarkets 4 Oversold Stocks for Traders
When strong stocks get hit–and hit hard–is it better to be a buyer or seller? What we found out about the habits of highly effective stocks might surprise you.
Don’t be upset if your first tendency is to think that a stock that falls by 2%, 5% or even 10% is better off sold. Much of what we learn about trading–from having a trading discipline to cutting your losses short and letting your winners run–supports the idea that being long a stock, or making plans to buy a stock, that is down big is a bad idea. After all, we want stocks that are going up. And stocks that are down by 10% or worse are hardly stocks that are going up!
Unfortunately, this is also one of the ways that the market plays tricks on those who try and trade stocks. While it is obvious that traders want to own stocks–even for a short period of time–that are moving up as opposed to down, the real question is this: what leads to a stock moving higher in a short period of time? A 10% rally or a 10% correction?
Through our research we found that, in general, stocks that had experienced big corrections tended to outperform stocks that had experienced big rallies. This outperformance was true in both one-day, two-day and one-week time frames. And while it goes against conventional trading wisdom which still encourages us to buy breakouts and sell breakdowns, there is some common sense to our research that should make it easy for traders to understand and digest its profitable implications.
A stock that is up 10% has ALREADY made its move. We are not interested in buying stocks that have gained 10% on the hope that they rally an additional 5 or 10%. We are far more preoccupied with buying stocks that haven’t made their “10 percent” moves yet. And the statistics derived from our study of millions of simulated stock trades between 1995 and 2007 tell us that the stocks most likely to make those bit “10 percent” type moves are the stocks which, believe it or not, have already experienced 10% moves–only in the opposite direction.
So, in other words, if you want to find a stock that is likely to move significantly higher, first find one that has moved significantly lower.
One caveat we add to this method–especially at a time when the broader markets are struggling to rally above their 200-day moving averages–is that the stocks that are down big still be trading above their 200-day moving averages. Using the 200-day moving average as a filter in this way helps eliminate those stocks that may truly be on their way to oblivion. And while not infallible, the support provided by the 200-day moving average is significant enough that stocks retreating to or toward that level often find it difficult–though not impossible, of course–to fall further.
Click here to read our research into trading stocks that have been down by 10% or more in the past five days.
All of the stocks in today’s report have Short Term PowerRatings of 8. This puts all four stocks in that cohort of equities that our research suggests are likely to outperform the average stock by more than 8 to 1 over the next five days. I have also listed the 2-period Relative Strength Index (RSI) values for each stock. Our research into trading stocks with the 2-period RSI suggests that stocks are oversold when their 2-period RSI falls below 10 and critically oversold when their 2-period RSI falls below 2.
Denbury Resources
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DNR |
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PowerRating). RSI(2): 10.64
EOG Resources
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EOG |
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PowerRating). RSI(2): 11.82
Omega Protein
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OME |
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PowerRating). RSI(2): 11.75
Mechel OAO
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MTL |
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PowerRating). RSI(2): 6.16
Tired of losing money trading breakouts and breakdowns? Our special, Free Report, “5 Secrets to Short Term Stock Trading” will show you some of the key strategies and attitudes that traders throughout history have used to determine the right time to buy and the right time to sell. Click here to get your free copy of “5 Secrets to Short Term Stock Trading” — or call us today at 888-484-8220.
David Penn is Senior Editor at TradingMarkets.com.