Nasdaq Trading Strategies for Swing Traders

Down close-to-close but up on the day, the Nasdaq developed a 2-period RSI of less than 10 about an hour after the market opened, paving the way for buyers to begin wading in to the market in search of oversold stocks now at bargain prices.

Quality Systems Inc. (QSII | Quote | Chart | News | PowerRating) Short Term PowerRating 9. RSI(2):

What are the best trading strategies for traders looking to pick up stocks after major declines? For swing traders who look to buy weakness, major declines in the markets can provide a wealth of opportunities. However it is important that traders stick to the right stocks when looking to trade after major corrections. While there are many stocks that are exceptionally oversold after such declines, swing traders need to be able to tell the difference between those stocks that are likely to recover and those oversold stocks that are more likely to remain oversold.

Synovis Life Technologies Inc. (SYNO | Quote | Chart | News | PowerRating) Short Term PowerRating 9. RSI(2): 1.59

We use the 200-day moving average as our "line in the sand." Our testing has shown that stocks that pull back or correct while trading above the 200-day moving average are, in general, more likely to recover and move higher than those stocks that pull back or sell-off while trading below the 200-day moving average.

Sapient Corporation (SAPE | Quote | Chart | News | PowerRating) Short Term PowerRating 8. RSI(2): 0.967

This tendency is all the more pronounced based on where the broader market is located vis-à-vis its 200-day moving average. As we noted back in the fall of 2007, when markets like the S&P 500 are trading below their 200-day moving average, traders should stick to only buying stocks that are trading above their 200-day moving average. This is one of the most fundamental, but one of the most crucial, edges that every swing trader can and should take with them when they go hunting for stocks.

Vnus Medical Technologies Inc. (VNUS | Quote | Chart | News | PowerRating) Short Term PowerRating 8. RSI(2): 0.719

This is not to say that some stocks below the 200-day moving average will not rally - and continue to rally - up to and eventually above the 200-day moving average. But it does mean that the odds are against it. For every stock that does make it across that line, there are several stocks below the 200-day moving average that rally, but fail. These are stocks to be avoided, not bought, regardless of how oversold they are.

Wind River Systems Inc. (WIND | Quote | Chart | News | PowerRating) Short Term PowerRating 8. RSI(2): 6.88

Of the five stocks in today's report, two have Short Term PowerRatings of 9 and three have Short Term PowerRatings of 8. We found that stocks with Short Term PowerRatings of 8 outperformed the average stock by a margin of more than 8 to 1 after five days. Stocks with Short Term PowerRatings of 9 fared even better, besting the average stock after five days by a margin of more than 13 to 1.

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David Penn is Editor in Chief at TradingMarkets.com.