Trading Strategies for Down Markets: 3 Oversold Stocks for Traders

Stocks slipped from their early intraday highs on the final trading day of a holiday shortened week, but are moving higher an hour after the open.

One of the positive things about trading pullbacks rather than breakouts is that when markets turn down, there often remain a large number of opportunities in the form of strong stocks in which investors and traders are taking profits.

These are the stocks that, but for the overwhelming bearishness of the broader market, would likely still be moving higher. Or, failing that, the profit-taking corrections these stocks experience would be less severe as they tend to be.

Lindsay Manufacturing Company (LNN | Quote | Chart | News | PowerRating) Short Term PowerRating 10. RSI(2): 0.439

Traders can take advantage of the intensity of these pullbacks by not only sticking with high Short Term PowerRatings stocks, but also by making sure that they look to enter positions in these stocks BELOW their closing price.

A high Short Term PowerRating of 9 or 10 tells traders that a stock belongs to that group of stocks that have a shown a historical edge versus the average stock over a period of 5 days. 9-rated stocks, for example, have shown in our testing to outperform the average stock by a margin of more than 13 to 1 after 5 days. Our highest rated stocks, our 10s, have bested the average stock by nearly 17 to 1 over the same time period.

National Coal Corporation (NCOC | Quote | Chart | News | PowerRating) Short Term PowerRating 10. RSI(2): 1.30

But the most effective way to trade these stocks is not to buy them immediately, but to set a sort of "trap" beneath the stock. The goal is to catch the last, latest sellers of a stock - when babies start to get thrown out with the bathwater - who typically are the ones whose late decision to sell AFTER so many others have already done so often points to at least a short term bottom in the stock.

Essentially, we are looking for those who are bearish on a stock to overplay their bearishness, selling a stock that has already corrected by a large amount. Our research into stock price behavior in the short term from 1995 to 2007 indicates that buying stocks in this condition can lead to not only excellent trading gains, but a high win rate and minimal drawdowns.

Trinity Industries Inc. (TRN | Quote | Chart | News | PowerRating) Short Term PowerRating 9. RSI(2): 0.628

All three stocks in today's report also have 2-period RSIs of less than 2. Our research also indicated that stocks with 2-period RSIs of less than 2 have outperformed the average stock in one-day, two-day and one-week timeframes. When combined with high Short Term PowerRatings, such stocks are often among the most attractive candidates for trades to the long side.

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 at TradingMarkets.com