4 Oversold Stocks for Traders: CMED CMO CYBS FRME

It seems like it's been some time since we've been able to point to oversold stocks that may be due for a bounce. And its all the more strange given the prevailing tone of weakness in the markets--a tone that should lend itself to opportunities for traders to buy dips and pullbacks in strong stocks.

When dealing with markets that are below their 200-day moving averages, as is the case with the Dow industrials, S&P 500 and Nasdaq, traders have to be particularly discriminating in choosing the stocks they will trade and the way they will trade them. Certain habits and practices that are generally sound ones for traders become almost commandments when the markets are under pressure and pessimism toward the future reigns.

These habits and practices turned commandments include rules such as only buying stocks when they are trading above their 200-day moving average, and only selling stocks when they are trading below their 200-day moving average. Another such "commandment" is avoid the temptation to "chase" stocks higher or lower by using limit orders below the close when looking to buy or above the close when looking to sell short.

One of the things that make our Short Term PowerRatings so helpful for traders is that they "pre-screen" the market. By using our Short Term PowerRatings alone--even without tools such as PowerRatings Charts and our TradingMarkets Stock Indictors--traders can spot the kind of strong stocks in pullbacks that should be bought and the kind of weak stocks that are bouncing that should be sold.

Of course, by using our PowerRatings Charts and TradingMarkets Stock Indicators, traders can narrow their focus to key in on only the best opportunities out of a given set of stocks. Out of a set of 10 stocks, for example, all with low, Short Term PowerRatings of 2, only a few may have some of the key tells such as multiple consecutive higher highs or extremely low Relative Strength Index values that alert traders to the possibility of truly superior opportunities.

Just such opportunities are suggested in four stocks featured this morning, all of which have pulled back significantly in recent days. These four oversold stocks not only have extremely low 2-period RSIs of less than 2, but also display some of the other characteristics that our research has suggested tend to led to outperformance relative to the average stock in one-day, two-day and one-week timeframes.

For example, in addition to having an RSI of 1.41, China Medical Technologies (CMED | Quote | Chart | News | PowerRating) has been down more than 10% over the past five days. The stock has a PowerRating of 8 and, as we see in the stock's PowerRating Chart below, the last time the CMED earned a Short Term PowerRating of 8, the stock responded quite positively over the next several days.

Click here to read our latest research into stocks that have been down by 10% or more in five days or less.

Two other stocks in today's discussion also have extremely low 2-period RSI values of less than 2. But these two stocks also have experienced five or more consecutive down days--another major indicator we have discovered. Stocks that experience five or more consecutive negative sessions have, contrary to conventional wisdom, actually outperformed their peers in the short-term. These stocks often provide excellent examples of how sooner or later, there is no one left to sell a stock short and, as the stock moves lower, an increasing number of traders looking to buy.

Capstead Mortgage (CMO | Quote | Chart | News | PowerRating)has an extremely low 2-period RSI of 0.70. The stock's PowerRating was downgraded over the balance of February as the stock peaked out and began to roll over.

First Merchants (FRME | Quote | Chart | News | PowerRating) has a 2-period RSI of just under 2 at 1.90. Notice how the stock's PowerRating plunged after soaring higher in late January.

To read more about our research into stocks that have experienced consecutive down days, click here

The last stock in featured in this morning's report is Cybersource (CYBS | Quote | Chart | News | PowerRating), which has a low 2-period RSI of 1.70, making it a candidate for traders looking to buy stocks on pullback. The stock's Short Term PowerRating has fluctuated widely over the past few months--from as low as 2 when the stock neared the $20 level to as high as 8 in mid-January just as the stock tested its 200-day moving average in advance of a surge higher a week later. The stock's current retreat to the 200-day moving average actually echoes somewhat that earlier pullback in January.

David Penn is Senior Editor at TradingMarkets.com.