PowerRatings Danger Zone

With stocks edging higher for their fourth day, the fact that the markets remain below their 200-day moving averages means that traders should be on the lookout for stocks that may have rallied too far too fast and are now vulnerable to reversal.

The opposite of trading stocks to the long side by buying weakness and selling strength is trading stocks to the short side by selling strength and covering weakness. So when it comes to stocks that traders may want to bet against, we are looking for stocks that are overextended to the upside - ideally those that are extremely overbought and under their 200-day moving averages.

This combination has been the ideal one, based on our research, for traders looking to wager against stocks. By focusing on those stocks that already are saturated with buyers, we stand a better chance of being able to take advantage of the inevitable profit-taking when some of these overcrowded buyers want out. And by sticking with stocks that are trading below their 200-day moving averages, we are targeting just those weak stocks that are mostly likely to resume their downtrending ways.

Let's look at some stocks that, as of the Monday close, look to fit all of the key characteristics of stocks that traders should avoid - or sell short.

ATC Technology Corp. (ATAC | Quote | Chart | News | PowerRating) Short Term PowerRating 1. RSI(2): 98.08

Shares of ATAC have been oscillating in a range between roughly $22 and $24 since at least late April. At the top of this range, as the PowerRatings chart shows, ATAC's Short Term PowerRating has slipped to 3 - warning traders that the upside was limited. Note how the stock retreated after each session in which the PowerRating fell to 3.

The breakout from this range has led ATAC's PowerRating even lower, dropping to a 2 on Friday and a 1 on Monday. The stock is now approximately one point away from its 200-day moving average.

Talbots Inc. (TLB | Quote | Chart | News | PowerRating) Short Term PowerRating 1. RSI(2): 99.03

Just peeking above its 200-day moving average in recent trading, Talbot's remains a very overbought stock with a 2-period RSI of more than 99.

Much like ATAC, shares of Talbots have rallied out of a trading range that extended back to late April. Also like ATAC, Talbots' Short Term PowerRating has declined dramatically over the past few days, falling to a 2 on Thursday, and a 1 on Friday.

Jarden Corp. (JAH | Quote | Chart | News | PowerRating) Short Term PowerRating 2. RSI(2): 98.89

Jarden Corp. is our sole 2-rated stock in today's report. The stock has been moving higher ever since making a low near $16 in the first few days of June.

In some ways, Jarden looks now as both Talbots and ATC Technology Corp looked a few days ago. The stock has lost its average Short Term PowerRatings as it has moved higher, slipping to a Short Term PowerRating of 2 on June 11th - a rating it has sustained for the past four days.

Recall that stocks with Short Term PowerRatings of 1 - our lowest possible rating for a stock - have underperformed the average stock by nearly 5 to 1 after five days. This makes 1-rated stocks among the most ideal candidates for traders looking to sell stocks short.

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.

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 of TradingMarkets.com.