Why You Should Avoid Stocks with High RSI Readings
Each day,
TradingMarkets publishes
7 Trading Ideas for Today, a selection of stocks from our daily indicators. TradingMarkets
Stock Indicators are based upon our latest quantitative research, and
highlight trading edges backed by our database of more than 7-million historical
simulated trades.
On Thursday,
April 26, iRobot Corp.
(
IRBT |
Quote |
Chart |
News |
PowerRating) was
a candidate from the our
2-Period RSI Greater than 98 list.
These are stocks that have a 2-day RSI reading above 98 and are trading below
their 200-day moving average. Our research shows that stocks trading below their
200-day
moving average with a 2-period RSI reading above 98 have shown negative
returns, on average, 1-day and 1-week later. Historically, these stocks have
provided traders with a significant edge. To learn more about our research into
stocks that have a 2-period RSI above 98, and how to use this information, click
here.
The
TradingMarkets mantra is to “buy weakness, sell strength,” and that is exactly
what you could have done here. On 4/26/07, IRBT had an RSI rating of 99.22,
which warned that buyers may be exhausted. The first blue arrow was a
potential short entry into IRBT. If the position was covered 5-days later
at the second blue arrow, you would have made 5.9% on the trade.
1-day later, IRBT was
–3.2%
2-days later, IRBT was -2.6%
5-days later, IRBT had declined -5.9%
This is an example of an edge
that took less than the full 5 days to unfold.
Obviously,
results like these do not occur every time, but
our quantified research clearly shows that the edges exist during extreme
oversold or overbought conditions.
Check out our
latest quantified research articles
here. If
you don’t already have a TradingMarkets subscription,
click here
for a free 7-day trial. Check back daily for more 7 Trading Ideas for Today,
and develop your own watchlist of stocks with historically-backed edges.
Darren Wong
Associate Editor
Reminder: We are in no way recommending the purchase or short sale of
these stocks. This article is intended for education purposes only. Trading
should be based on your own understanding of market conditions, price patterns
and risk; our information is designed to contribute to your understanding.