TradingMarkets Danger Zone
Stocks are off to a strong start on Wednesday, following through on strong gains from yesterday’s session. Sector participation is broad, as witnessed by the early advances in sector-based, exchange-traded funds including the financials, consumer staples and basic materials.
When markets are moving higher, there tend to be two tasks for stock traders who look to buy weakness and sell strength. The first, happiest, task is profit-taking. As sellers of strength, traders who buy pullbacks are often in a position to take profits when markets are rising. This is opposed to looking for entry opportunities in the “buy high, sell higher” mode of momentum trading.
Avid Technology Inc.
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AVID |
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PowerRating) Short Term PowerRating 1. RSI(2): 86.14
In fact, it could be argued that when swing traders who buy on pullbacks are taking profits and selling their positions, many of those buyers are momentum traders. As we are exiting the train, the “buy high, sell higher” crowd is just climbing on board.
CKX Inc.
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PowerRating) Short Term PowerRating 1. RSI(2): 96.41
The other task for swing traders who sell strength is to keep an eye out for stocks that have become, in a sense, “too strong.” These are stocks that our research indicates are significantly overbought and vulnerable to reversal.
When these stocks are above their 200-day moving averages, we can use their overbought conditions — and accompanying low Short Term PowerRatings — as signals that pullbacks in these stocks may be just around the corner. As I have shown in other Short Term PowerRatings articles, particularly my “PowerRatings Chartology” series, low Short Term PowerRatings in stocks above the 200-day moving average often anticipate corrections and profit-taking, and can serve almost as alerts.
L.B. Foster Company
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FSTR |
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PowerRating) Short Term PowerRating 1. RSI(2): 99.53
However, when these stocks are below their 200-day moving averages — as is the case with all five stocks here — these stocks become more than just candidates for pullbacks. For more aggressive traders, they become potential candidates for short sales.
Pinnacle Airlines Corporation
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PNCL |
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PowerRating) Short Term PowerRating 1. RSI(2): 98.20
All of the stocks in today’s report have Short Term PowerRatings of 1. Our research into short term stock price behavior indicates that stocks with Short Term PowerRatings of 1 have underperformed the average stock by a margin of nearly 5 to 1 after five days.
Note also that three of the stocks listed here have 2-period RSIs of more than 98. We have found that stocks with 2-period RSIs of more than 98 have produced negative returns in one-day and one-week timeframes. You can read more about our research into the 2-period RSI here.
Select Comfort Corporation
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SCSS |
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PowerRating) Short Term PowerRating 1. RSI(2): 99.87
When combined with low Short Term PowerRatings, 2-period RSIs that are greater than 98 serve as a powerful warning that a particular stock may be especially vulnerable to a reversal to the downside in the near term.
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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Whether you have a trading strategy of your own that could use a boost or are looking for a way to tell the stocks that will move higher in the short term from the stocks that are more likely to disappoint, our Short Term PowerRatings are based on more than a decade of quantified, backtested simulated stock trades involving millions of stocks between 1995 and 2007. Click the link above or call us at 888-484-8220, extension 1, and start your free trial today.
David Penn is Senior Editor at TradingMarkets.com.