Good to Great: 4 PowerRatings Upgrades for Traders

It would probably be too much to say that a day when the Dow loses 250 points is a good day. But for traders who have been waiting for stocks to pull back to lower, more affordable prices, Friday's sell-off was a blessing in disguise.

As I wrote recently, two things happen when the broader market pulls back—as the markets did on Friday. One is that overbought stocks, stocks that had been flying high and feeling no pain, suddenly start to feel a sense of discomfort. That discomfort is the pressure of sellers who increasingly realize that they have gains that they can take off the table. And when the broader markets sell off, those with gains in overbought stocks are the ones who tend to lead the selling.

The other thing that happens when markets sell off is that stocks pull back. To be sure, some of the stocks that pull back are weak stocks for whom the sell off is almost a death blow. These are the weak stocks, trading below the 200-day moving average, who have managed to "sneak up" on the market, moving higher for a few points while the market was rallying or moving sideways or otherwise giving few big reasons for traders and active investors to be thinking about selling stocks.

When the sell-off arrives however, most stocks have a hard time escaping the pressure. The best stocks, the strong stocks that we look to buy on pullback, are no exception. The difference is that our research tells us that we can have the confidence to buy these strong stocks as they pullback provided they (a) are trading above the 200-day moving average and (b) are in fact pulling back—and the deeper the better.

Keeping these two contexts in mind can help traders avoid quite a few bad trades. Why look to buy a stock that is trading below the 200-day moving average when there are plenty of opportunities to buy stocks that are strong and trading above their 200-day moving averages? Our research into the behavior of stocks in the short term tells us that there is no edge in the first scenario. But in the second scenario, we have found that not only can stocks be bought at attractive prices, but also these stocks have a high likelihood of ending their pullbacks and reversing back to the upside within five to eight days.

Below we have the names of the four oversold stocks that experienced upgrades to their Short Term PowerRatings over the course of trading on Friday. In parenthesis is the Short Term PowerRating as of Friday's open. I have also included the 2-period Relative Strength Index—one of the most effective and helpful technical indicators available to the short term trader. Markets are considered oversold when the 2-period RSI falls below 10. Markets are considered extremely oversold when the 2-period RSI falls below 2.

Vaalco Energy (EGY | Quote | Chart | News | PowerRating). Short Term PowerRating 6 (from 8). RSI(2): 20.58

Chart Industries Inc. (GTLS | Quote | Chart | News | PowerRating). Short Term PowerRating 6 (from 8). RSI(2): 11.29

Ampco Pitts Corporation (AP | Quote | Chart | News | PowerRating). Short Term PowerRating 8 (from 5). RSI(2): 12.73

DTS Inc. (STDI | Quote | Chart | News | PowerRating). Short Term PowerRating 8 (from 6). RSI(2): 10.08

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David Penn is Senior Editor at TradingMarkets.com.