Watching PowerRatings, Waiting for the Trade
Stocks sold off aggressively on Monday, with the S&P 500 losing more than 4% and the Dow industrials closing below 6,800.
As short term traders, runaway markets like the one we’ve been experiencing for the past few days can make for difficult trading. Actually, was is difficult about the markets of the past few days isn’t trading them, it is not trading them.
The virtue of our Short Term PowerRatings is that they let short term traders know when the edges are on their side and when they are not. A stock with a high Short Term PowerRating has an edge relative to a stock or ETF with a lower Short Term PowerRating. We also know, if anecdotally, that when our Top 25 PowerRatings List has more 9-rated stocks than 8-rated stocks, that our Short Term PowerRatings are telling us that there is a growing number of top quality pullbacks from which to choose compared to days when the Top 25 consists entirely — or almost entirely — of stocks and ETFs with Short Term PowerRatings of 8 or 7.
There is a third edge to be derived from reviewing Short Term PowerRatings. Here, I like to look at the Short Term PowerRatings of major market proxies like the SPY, the DIA and the QQQQ. When these market proxies — exchange-traded funds all — develop high Short Term PowerRatings, then I know that there is a likelihood that the broader markets will rally, potentially bringing higher many of the high Short Term PowerRatings stocks and ETFs, as well.
Right now, both the SPY and the DIA have Short Term PowerRatings of 8, while the QQQQ has a Short Term PowerRating of 7. Again, while we would not trade the SPY, DIA or QQQQ to the upside because all three trade below their 200-day moving averages, the fact that they have become so oversold as to earn Short Term PowerRatings of 8 lets us know that the possibility of the markets developing some short term upside is better than it has been for many days.
Of the high PowerRatings stocks that have been offered in recent days, one — the ProShares UltraShort Financials ETF
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PowerRating) — has been truly impressive, up nearly 12% on Monday alone. Other stocks have fared less well, some of them falling below the 200-day moving average.
The stocks that have fallen below the 200-day are not places where new capital can be placed. Even though the oversold conditions in these stocks is still statistically likely to be met with resurgent buying pressure, we view the 200-day moving average as a line in the sand when it comes to new trades. With regard to those stocks mentioned in the past two columns that have not yet fallen below their 200-day moving averages, short term traders can still consider them for pullback trades, as long as their Short Term PowerRatings remain at 8 or better.
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