TradingMarkets Monday Stock Movers: RES, NEU, LNN, FRME, MFB
This week’s edition of TradingMarkets Monday Stock Movers features five stocks, all of which have pulled back by 10% or more in the past few days.
Importantly, all of the pullbacks in these five stocks have occurred as the stocks were trading above their respective 200-day moving averages. And those who have followed our approach to short term stock trading over the years know that when we get pullbacks in strong stocks, we know that opportunities to buy low and sell high are often right around the corner.
For those who aren’t as familiar with our approach to trading, the idea of looking forward to the opportunity to buy stocks that have corrected by 10% or more in a short period of time may sound, well, crazy. After all, who buys stocks that are “crashing”? If a stock goes down by 10%, goes this line of thinking, what is stopping it from going down by 15% or 20%? Isn’t this just “catching a falling knife”?
Our research into short term stock price behavior, research that analyzed millions of short term stock trades between 1995 and 2007, suggests otherwise. Our research, for example, tells us that buying stocks that are “crashing” is better than buying stocks that are “soaring”–at least in the short term. That same research indicates that not only is buying a stock that is down by 10% or more in a short period of time more often than not a good short term trade to the upside, but that trade is often even more attractive if the stock is hit even harder, losing 15, 20 or 25% or more.
And when it comes to “catching falling knives,” our answer is simple. To paraphrase the senior researcher for Connors Research and TradingMarkets, Cesar Alvarez, with whom I spoke this spring for an upcoming profile: bring them on.
We put only one real caveat to all of this: we are looking for all of these developments–crashing stocks, down 10% or more, “falling knives”: the stock must be a strong stock. And by strong stock, we mean a stock that is trading above its 200-day moving average.
Our research into short term stock price behavior bears this out. We examined millions and millions of short term stock trades between 1995 and 2007. Among our conclusions was that strong stocks, stocks that were trading above their 200-day moving averages–tend to produce positive returns in one-day, two-day and one-week timeframes when they pullback by 10% or more over the span of five days.
To read our research into stocks that have lost 10% or more over the past five days, click here.
While having more than a decade of quantified data certainly helps convince us of the integrity of this set-up, in which we look to buy stocks that are trading above their 200-day moving averages and are down by 10% or more within five days or less, there is a great deal of common sense involved as well. Look at several charts of strong stocks in uptrends. You will undoubtedly notice instance after instance in which the stock, after bolting higher, pulled back–sometimes severely–as traders took profits. In most of these cases, the cases of strong stocks, the stocks went on to resume their advances, typically making new highs.
Sure, sooner or later a stock will not just pull back, but will top, begin moving lower and continue moving lower. But until that happens, swing traders who look to buy the pullbacks, “the dips” as some traders call them, will be able to make good day-to-day profits long before the eventually TOP actually arrives.
In other words, traders who fear buying pullbacks because of the idea that, sooner or later, one of those pullbacks will be the beginning of a bear market are wrong-headed, in our opinion, and likely missing out on great opportunities to buy strong stocks as they pull back and become less expensive.
All five stocks in today’s report have Short Term PowerRatings of 8 or higher, with two stocks having Short Term PowerRatings of 9 and two stocks having Short Term PowerRatings of 10. Stocks with our highest Short Term PowerRating of 10 have outperformed the average stock by a margin of nearly 17 to 1 within the next five days, according to our research.
Note also the 2-period Relative Strength Index values accompanying each stock. We believe the 2-period RSI is one of the best indicators for short term traders looking to identify truly overbought and oversold markets. We consider markets with 2-period RSI values of more than 90 to be overbought and 2-period RSI values of less than 10 to be significantly oversold.
RPC Inc.
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RES |
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Chart |
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PowerRating). Short Term PowerRating 10. RSI(2): 4.11
NewMarket
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NEU |
Quote |
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PowerRating). Short Term PowerRating 10. RSI(2): 2.60
Lindsay
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LNN |
Quote |
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PowerRating). Short Term PowerRating 9. RSI(2): 12.73
Maidenform Brands
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MFB |
Quote |
Chart |
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PowerRating). Short Term PowerRating 9. RSI(2): 8.49
First Merchants
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FRME |
Quote |
Chart |
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PowerRating). Short Term PowerRating 8. RSI(2): 6.48
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.