There have been few stocks as newsy as Yahoo! (YHOO | Quote | Chart | News | PowerRating) has been in recent weeks. From the failed Microsoft bid to takeover the company to the latest news that billionaire/activist investor Carl Icahn is seeking a proxy fight with the Yahoo! board of directors, traders and investors alike have been spending a lot of time weighing Yahoo! and its fortunes.
Traders who rely on our Short Term PowerRatings to help them determine which stocks to trade – and when – tend not to be swayed by the vagaries of the news cycle. These traders are confident that whatever they need to know about a stock – whether it is a relatively unknown name or a stock that can't find its way out of the headlines – is likely found in its price chart and its PowerRating.
So what have Short Term PowerRatings told us about Yahoo! in recent weeks? Most interestingly, we can see that the last two times that Yahoo's Short Term PowerRating climbed to the "consider buying" range of 8 or higher, the stock indeed did move higher in the short term.
Here we'll take a look at both of those instances to show traders unfamiliar with our approach to trading just how well buying pullbacks in strong stocks can work.
As the PowerRatings chart below shows, Yahoo had a Short Term PowerRating of 5 on March 10. As the stock moved lower, notice how the stock's PowerRating increased. This suggested that the stock was becoming an attractive candidate for short term trading. By the 14th, shares of Yahoo! had fallen to a closing low of $27.20 and its Short Term PowerRating had climbed to 8.
This is when short term traders – as far as we are concerned – should become interested in stocks like Yahoo! The stock moved a little lower the following day – providing an opportunity for traders to buy in on intraday weakness – and the next day had rallied to close back above its 5-day moving average. One of the more common exits we use with short term stock trades is a close above the 5-day moving average – just as Yahoo! did two days after its pullback ended.
From the close on the day Yahoo! earned its Short Term PowerRating of 8 to the close above the 5-day moving average, shares of Yahoo!
gained a little over $0.50. Not a bad gain for two days' work. The stock continued to rally for another eight days, finally making a rally closing high just north of $29.
There was a similar move more recently when Yahoo! again had a PowerRatings upgrade from the average ranks to a "consider buying" 8.
This swing took place in almost the same fashion, with the stock's Short Term PowerRating rising as the stock pulled back toward its 200-day moving average. Once again, the stock's Short Term PowerRating of 8 was followed by a lower day (another opportunity to buy on intraday weakness) that actually ended up closing above the 5-day moving average.
From close to close, Yahoo! picked up more than 90 cents in a day.
Not every stock will respond as immediately and as profitably as Yahoo! did in March and April. But the point of this discussion was to show how traders use our Short Term PowerRatings to spot opportunities in stocks of all types. Whether the stock you are studying is an obscure Nasdaq name or a company "ripped from today's headlines," you are likely to find out Short Term PowerRatings to be a powerful guide to steer you toward those stocks that are most likely to outperform in the short term.
Does your stock trading need a tune-up? Our highest Short Term PowerRatings stocks have outperformed the average stock by a margin of nearly 17 to 1 after five days.
Whether you have a trading strategy of your own that could use a boost or are looking for a way to tell the stocks that will move higher in the short term from the stocks that are more likely to disappoint, our Short Term PowerRatings are based on more than a decade of quantified, backtested simulated stock trades involving millions of stocks between 1995 and 2007. Click the link above or call us at 888-484-8220, extension 1, and start your free trial today.
David Penn is Senior Editor for TradingMarkets.com.
