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The day after the Dow was rocked for 350+ points, we have a market that is loaded with quality pullbacks. Caution - and buying on intraday weakness - are the themes for the day.
As I wrote in a PowerRatings piece late yesterday, when markets pullback sharply - as they did yesterday - traders who buy weakness can afford to be patient, if not downright discriminatory, when it comes to taking new positions. While traders may become overwhelmed with the temptation to trade lower Short Term PowerRatings stocks during normal markets conditions, it is imperative that traders "keep the bat on their shoulder" more often when selling pressure seems overwhelming and instead wait for the "perfect pitch."
Canadian Solar
What is the "perfect pitch" when it comes to trading in the short-term? For starters, if the stock does not have a Short Term PowerRating of at least 9, and preferably 10, then traders should probably take a pass. Generally speaking, stocks with higher Short Term PowerRatings are experiencing deeper pullbacks than stocks with lower Short Term PowerRatings. Because we are looking to take positions after stocks have reached an extreme to the downside, it is preferable to wait for stocks to reach those extremes BEFORE taking a position, rather than taking a position too soon and riding the stock still lower.
Woodward Governor Company
The other key factor is ensuring that the stocks being analyzed have very low 2-period RSI values. By "very low", I mean a 2-period RSI that is at least below 5 and preferably below 2. Again, we want stocks to have reached oversold extremes before we take positions, not after. Because of the fear that dramatic selling can induce, stocks and markets can be all the more prone to moving lower than traders expect - sometimes far lower. This means that levels that might be seen as extreme under normal conditions may not be so extreme when markets are aggressively selling off. As such, we have found it better to wait for stocks to be clearly and dramatically oversold.
Monsanto Company
Let's take a look at some of the stocks. All five of these stocks have Short Term PowerRatings of 9 and 2-period RSIs of less than 5 as of this writing (Friday morning, approximately 30 minutes after the open). The 2-period RSIs displayed here are as of the Thursday close and are higher in all instances than RSIs Friday morning after the open..
Canadian Solar (CSIQ | Quote | Chart | News | PowerRating) Short Term PowerRating 9. RSI(2): 8.09
Lindsay Corporation (LNN | Quote | Chart | News | PowerRating) Short Term PowerRating 9. RSI(2): 4.77
McMoran Exploration (MMR | Quote | Chart | News | PowerRating) Short Term PowerRating 9. RSI(2): 6.01
Woodward Governor Company (WGOV | Quote | Chart | News | PowerRating) Short Term PowerRating 9. RSI(2): 3.24
Monsanto Company (MON | Quote | Chart | News | PowerRating) Short Term PowerRating 9. RSI(2): 4.26
Again, all five of these stocks have 2-period RSIs of less than 5 in the first half hour of trading on Friday. Particularly noteworthy are CSIQ, which is down for six consecutive sessions going into today, and WGOV, which is down for four consecutive trading days. In addition to high Short Term PowerRatings and low 2-period RSIs, our research has found that stocks that are trading above their 200-day moving averages and have been down for five or more consecutive days tend to outperform the average stock in one-day, two-day and one week timeframes. This makes these stocks especially attractive for traders looking to buy otherwise worthy stocks that the market has abandoned.
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David Penn is Senior Editor at TradingMarkets.com.
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