Trade Gaps Down with a Quantified Edge

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 Wednesday, March 14, American Oriental Bioengineering (AOB | Quote | Chart | News | PowerRating) was the candidate from the Gaps Down 5% or More list. These are stocks that gap down by 5% or more and are trading above their 200-day moving average. Our research shows that stocks trading above their 200-day moving average that gap down by more than 5% have shown positive returns, on average, 1-day, 2-days and 1-week later. Historically, these stocks have provided traders with a significant edge.

The TradingMarkets mantra is to "buy weakness," and that is exactly what you could have done here. While everyone in the media was warning of major weakness, our research shows that these types of oversold conditions create a bullish edge for stocks.

1-day later, AOB closed +3.7%.
2-days later, AOB closed +10.5%.
5-days later, AOB closed +11.9%.

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.

John Lee
Associate Editor
johnl@tradingmarkets.com