TradingMarkets Danger Zone: 3 Stocks for Swing Traders
Stocks are moving higher in the first few hours of trading on Thursday following Wednesday’s late sell-off.
It is a fact that sooner or later, stocks will rally and continue to rally until they move up and beyond the 200-day moving average. Shortly after that moment, the major market indexes will pullback to that 200-day moving average and, in the language of classic technical analysis, “test that level for support.” That test, sooner or later, will be successful and a new bull market – even if it is merely an intermediate bull market swing in a still – unfinished bear market – will begin.
Chipotle Mexican Grill
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CMG |
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PowerRating) Short Term PowerRating 2. RSI(2): 98.10
In this, the rally we are seeing in stocks on the morning of October 30, 2008 is little different from any of the other rallies we’ve seen since the bear market began a year ago. Maybe this one will be The One.
But until then, historical analysis suggests that traders are better off looking to fade rallies as opposed to participating in them indiscriminately. As one observer noted yesterday, the major market indexes have failed to have two successively strong days all month. Even in September, the rare three-day rally was only an opportunity for those who had not yet sold their stocks to do so. The same was true for August, July, June…
Tortoise Energy Capital Corporation
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TYY |
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PowerRating) Short Term PowerRating 2. RSI(2): 99.32
To this end, I want to highlight not just those stocks that represent opportunities to the long side for swing traders. It is also important to let traders know of opportunities to take advantage of stocks that are overextended to the upside.
For us, these opportunities are often characterized by a couple of features: low short term PowerRatings of 1 or 2 are one key signature of stocks that swing traders should avoid or look to sell short. But other features include such things as 2-period RSIs of more than 98 or rallies of 10% or more in stocks that are trading below their 200-day moving averages. All of this is short term stock behavior that our testing indicates often suggests the potential for underperformance – sometimes significant underperformance – in the near term.
VMware Inc.
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VMW |
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PowerRating) Short Term PowerRating 2. RSI(2): 99.10
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David Penn is Editor in Chief at TradingMarkets.com.