TradingMarkets Danger Zone
With the markets up four out of the past five days, traders should feel little surprise that a number of stocks may have moved too far too fast. Five of these stocks are in today’s TradingMarkets Danger Zone.
A few years ago we set out to determine what makes a stock rise or fall in the short-term, with “short-term” meaning that 5-8 day window in which short term stock traders prefer to operate. We looked at a number of characteristics–trend, momentum, volatility and volume–both alone and in combination and examined more than a million short-term stock trades between 1995 and 2007.
Our Short Term PowerRatings were the product of this research. Our Short Term PowerRatings enabled us to rate stocks on a scale from 1 to 10. The stocks with the highest Short Term PowerRatings, the stocks with the rating of 10, dramatically outperformed the average stock after five days. Specifically, we found that stocks with Short Term PowerRatings of 10 outperformed the average stock by nearly 17 to 1.
On the other hand are those stocks at the lowest end of the spectrum, the stocks with the Short Term PowerRatings of 1. These stocks are stocks that traders should definitely avoid–that is, unless traders are looking to bet against stocks, in which case stocks with Short Term PowerRatings of 1 are the first place where traders should look.
Why? Our research revealed that stocks with Short Term PowerRatings of 1, from 1995 to 2007, tended to underperform the average stock. How bad was the underperformance? Nearly 5 to 1.
It is this kind of underperformance that not only makes these stocks ones that traders looking to buy stocks should avoid, but also shows clearly why the lowest rated stocks can make for excellent short selling candidates. With an average underperformance of 5 to 1 versus the average stock, 1-rated stocks are likely to have the sort of significant price movement that would make a short trade potentially worthwhile.
I should add here that context is key. It is true that high Short Term PowerRatings stocks tend to be good buying opportunities and low Short Term PowerRatings stocks tend to be poor buying opportunities. But all stocks, in our opinion, should be screened through the filter of their 200-day moving average. This filter will help keep traders from selling stocks that, while sometimes having low Short Term PowerRatings, are still exhibiting enough strength by virtue of their trading above their 200-day moving average that they simply do not represent the same high probability trade that selling short a stock that has a low Short Term PowerRating and is trading BELOW its 200-day moving average.
Click here to read our research into the role of the 200-day moving average as a stock filter.
Trading is a game of odds and probabilities. The highest probability trades, according to our research, involve buying high Short Term PowerRatings stocks when they are trading above their 200-day moving averages and selling low Short Term PowerRatings stocks when they are trading below their 200-day moving averages. This is one of the key edges that combining Short Term PowerRatings with the TradingMarkets approach to trading can provide traders.
Let’s take a look at the PowerRatings charts of the five stocks in today’s report, as well as the 2-period Relative Strength Index (RSI) values for each. Again, all of the stocks in today’s report have Short Term PowerRatings of 1, making them among the least attractive stocks for traders right now. This also makes these stocks very attractive candidates for traders looking to bet against stocks, using the recent market strength as an opportunity to sell.
LifeTime Fitness
(
LTM |
Quote |
Chart |
News |
PowerRating). RSI(2): 98.44
Barnes Group
(
B |
Quote |
Chart |
News |
PowerRating). RSI(2): 98.68
AM Castle and Company
(
CAS |
Quote |
Chart |
News |
PowerRating). RSI(2): 97.15
Ceradyne
(
CRDN |
Quote |
Chart |
News |
PowerRating). RSI(2): 91.83
Onyx Pharmaceuticals
(
ONXX |
Quote |
Chart |
News |
PowerRating). RSI(2): 96.68
For more simple and straightforward tips on short-term stock trading, consider getting a copy of our free report, written especially for those who trade stocks in the short-term “sweet spot” of five to eight days. Click here to get your copy of “5 Secrets to Short Term Stock Trading Success”–or call us at 888-484-8220–and see what the TradingMarkets approach to trading can do to make you a better trader.
David Penn is Senior Editor at TradingMarkets.com.