Jeff Macke of CNBC's Fast Money suggested a few days ago that the market correction was not likely to end until there was a capitulation moment, a big swoosh in which a plunging stock market was met by a virtual armada of buyers who finally saw bargains in stock prices that were too great to ignore.
I do not know if Wednesday was the capitulation low. But it is clear from the growing number of high PowerRatings stocks that there are quality names that have been sold and sold hard over the past few weeks. And when selling is this aggressive, there is a great chance that more than a few babies got tossed out with the bathwater.
Stocks that are rallying off of major bottoms often draw the most attention from investors. But this is an excellent time for short-term stock traders to be discriminating. As I wrote in this morning's Morning Coffee with TradingMarkets before-the-bell newsletter (click here
for your free subscription), now would be a good time for traders to re-read Larry Connors' article on trading markets below the 200-day moving average.
(Click here
to access Connors' article "Five Mistakes To Avoid in a Market Trading Below its 200-Day Moving Average.")
Why? Because the best way to trade a bounce in a market still in correction mode is to look for strong stocks that are falling to support, rather than betting on stocks that are flat on their backs, staring up at their 200-day moving average like a fighter who has been knocked unceremoniously to the canvass.
In other words, now is the time to take a good look at those stocks that are off their highs, stocks that are pulling back after making new highs or after breaking out. Buying weakness and selling strength means spotting these stocks and waiting for them to "come in"
-- and the further "in" the better.
One of the screens we use is found on our TradingMarkets Stock Indicators page which looks for stocks that are trading above their 200-day moving averages, but have exceptionally oversold Relative Strength Index (RSI) values of less than 2. We use the 2-period RSI rather than the more common 14-period RSI preferred by many chartists because, as Larry Connors and Ashton Dorkins pointed out in an article for TradingMarkets last year, the truly significant edge for short-term traders using the RSI comes from a much shortened time horizon (i.e., 2-periods) than are traditionally used.
(Click here
to access Connors and Dorkins' article on the 2-period RSI).
Scroll through a set of 200 or more stock charts looking for RSI values that are under 2 in stocks that are also trading above their 200-day moving averages. You will find that there are not very many stocks in this specific condition. However, those stocks that are exceptionally oversold yet still trading above 200-day moving average can be among the best short-term opportunities for traders.
All eight of our oversold stocks for traders today have PowerRatings of 9. Again, all have 2-Period RSI values of two or less, marking them as extremely oversold names. I am also noting the 100-day historical volatility (H.V.) of each stock. When looking to choose from among stocks for short-term trading, a higher historical volatility
-- all things considered -- is preferable to a lower H.V.
To help traders better seen how these stocks are shaping up, here are two charts from among the more volatile of today's oversold eight:
Zix Corporation and TiVo.
Zix Corporation (ZIXI | news | PowerRating | PR Charts ) H.V. 88.99
TiVo, Inc. (TIVO | news | PowerRating | PR Charts ) H.V. 57.93
The rest of the oversold eight are here:
Radiation Therapy Services (RTSX | news | PowerRating | PR Charts ) H.V.
61.16. (Note company being taken private by Vestar Capital Partners for $35.20 per share.)
TheStreet.com (TSCM | news | PowerRating | PR Charts ) H.V. 56.84
Ducommun Inc. (DCO | news | PowerRating | PR Charts ). H.V. 52.02
Triquint Semiconductor (TQNT | news | PowerRating | PR Charts ) H.V. 49.95
Salesforce.com Inc. (CRM | news | PowerRating | PR Charts ). H.V. 46.73
Alpha Natural Resources (ANR | news | PowerRating | PR Charts ). H.V. 44.55
