TradingMarkets Danger Zone: 3 Overbought Stocks for Traders
Stocks are getting a bid an hour and a half into the trading day. But the markets, while not quite as oversold as they were a few days ago, still seem to be more in pullback mode than bounce mode.
Or are they? These are tricky times for traders, as we attempt to divine whether or not the markets will successfully find a short-term bottom over the next few days. What we are focusing on, as always, are the numbers of high and low Short Term PowerRatings stocks that appear on our screens. In addition to using the individual ratings on individual stocks to find quality trading opportunities, traders can also use our Short Term PowerRatings alongside our TradingMarkets Stock Indicators to help better understand where the market is and where it is likely to go in the near-term.
For example, take an indicator like the 2-period RSI. Our research indicates that stocks are seriously overbought when the 2-period RSI climbs above 98, and seriously oversold when the 2-period RSI falls below 2. I like to check this indicator each day and see if there are more low Short Term PowerRating stocks appearing on the seriously overbought list compared to the number of high Short Term PowerRating stocks appearing on the seriously oversold list.
This allows me to know – regardless of what people are saying about the market or what I think about the market – where the quality set-ups are. If there are more seriously overbought stocks with low Short Term PowerRatings than there are seriously oversold stocks with high Short Term PowerRatings, then I know that my bias should be to stay in cash or look to sell stocks short.
Of course, on the other hand, if I see that the number of seriously oversold stocks significantly outnumbers the seriously overbought stocks, then I know that I should be looking for opportunities to buy on pullback.
The three stocks presented here reflect the current bias in this indicator, which is tilted toward cash or selling stocks short. As of Wednesday morning, there were 11 stocks in the seriously overbought list compared to only 5 stocks in the seriously oversold list. Although the reading from a single indicator is hardly comprehensive, it does provide a tool for traders to make sure that they are looking at the right stocks in the right way.
Ralcorp Holdings Inc.
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PowerRating) Short Term PowerRating 2. RSI(2): 98.58
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NutriSystem Inc.
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PowerRating) Short Term PowerRating 1. RSI(2): 99.34
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Emeritus Corporation
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PowerRating) Short Term PowerRating 1. RSI(2): 98.60
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Note especially the two stocks with 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.
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.
| Click here to start your free, 7-day trial to our Short Term PowerRatings! |
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.