TradingMarkets Stock Strategy shows you how short term stock traders can take advantage of the stocks you read and hear about everyday. See how buying weakness and selling strength remains one of the best ways for swing traders and short term stock traders to make money trading in the markets.
The Case of Microsoft and Yahoo
On Friday, Microsoft (MSFT | Quote | Chart | News | PowerRating) CEO Steve Ballmer looked to be making nice with Yahoo! (YHOO | Quote | Chart | News | PowerRating) by offering to raise its bid for the Internet company. All those Yahoo! shareholders who had been leading on their own corporate leadership to take-or least strongly consider-Microsoft bid headed into the weekend with visions of higher shares prices dancing in their heads.
But by Sunday, everything had been turned upside down. Ballmer indeed provided Yahoo! with a higher bid. But Ballmer's $33/share offer fell significantly short of Yahoo! insistence that the company was worth more, $4 per share more, to be specific. And that $4 per share difference appears to have been a deal breaker as Microsoft announced on Sunday that it was taking its bid and going home.
Yahoo! was down big Monday morning in the pre-market, while shares of Google rallied- likely reflecting the fact that whatever challenge Microsoft might have been able to make to Google after a Yahoo acquisition was not going to develop anytime soon.
Microsoft: From Overbought to Breakout Bust
Our PowerRatings and short term stock trading methods are powerful tools for traders looking to trade obscure, hard to find stocks as well as stocks making headlines. Consider first the PowerRatings chart of Microsoft below.
Note in the second half of April how Microsoft's Short Term PowerRating slipped from a 4 to a 3 as the stock rallied toward its 200-day moving average. We look at a stock like Microsoft as a weak stock because it is trading below its 200-day moving average. Stocks in this position, according to our research on short term stock price behavior, tend to experience many failed rallies before finally making the rally that eventually lifts them out of the "under 200" club.
As the chart shows, Microsoft continued to move higher even after its Short Term PowerRating had slipped, eventually rallying above and closing beyond the 200-day moving average.
But the warning provided by the PowerRating downgrade remained. One of the most dangerous times to buy a stock is when it breaks out, especially when the stock is a relatively weak one, because many of these breakouts fail. And a failed breakout is ultimately what happened to Microsoft three days after rallying above its 200-day moving average. The stock topped just north of $32 and reversed the next day. Within two days, Microsoft was lower than it was when its Short Term PowerRating was downgraded from 4 to 3.
Yahoo: High PowerRatings and Double Dips
While Microsoft provided an example of how our Short Term PowerRatings work with overbought stocks, Yahoo provides an example of how our Short Term PowerRatings work with oversold stocks-such as Yahoo!.
Look at the chart of Yahoo below.
On two occasions, shares of Yahoo dipped lower to test the 200-day moving average for support. In both instances—mid-March and late April—Yahoo's Short Term PowerRating earned an upgrade just one day before the test of the 200-day moving average.
One of the best times to buy high, Short Term PowerRatings stocks is when they are pulling back-and the deeper the better. Since we do not consider buying stocks when they are below the 200-day moving average generally speaking, a pullback to the 200-day moving average is in some ways the deepest possible pullback. Strong stocks with high Short Term PowerRatings that have pulled back to their 200-day moving averages can be among the most compelling trades to the upside.
That was certainly the case in Yahoo. Both in mid-March and late April, Yahoo! rallied strongly after its Short Term PowerRating upgrade. Two days after its Short Term PowerRating was upgraded to an 8 in mid-March, Yahoo! was higher. The move after the Short Term PowerRating upgrade in late April was even swifter, with Yahoo! moving up the day after the upgrade.
Not every stock will respond as immediately and as profitably as these two stocks have. But the point of this discussion was to show how the same techniques we use to help traders spot opportunities in the everyday stock can also be used to help trade the "big name" stocks that traders want to know about and, potentially, profit from.
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David Penn is Senior Editor for TradingMarkets.com.
