PowerRatings Chartology: 3 Stocks for Swing Traders

Dramatically oversold conditions as of Thursday's close have helped provide a boost to stocks after the first hour of trading on Friday.

Without an understanding of how oversold stocks had become yesterday - the S&P 500 had a 2-period RSI of approximately 20 on Thursday's close - traders might otherwise be mystified at how stocks are rising given the worse-than-expected jobs report and continued uncertainty over the fate of the Wall Street bailout bill that the U.S. House of Representatives will vote on later today.

If buyers continue to press their bets over the balance of the day, then we are likely to become swiftly overbought, given the fact that we are still below the 200-day moving average. This would add a few days to our timeline of when we should expect to see a higher number of quality pullbacks. On the other hand, if the rally fails, then we are likely to see the number of high Short Term PowerRatings stocks - or at least the ratio of 9s to 8s, for example - begin to grow.

In today's PowerRatings Chartology, I wanted to take a look at a couple of features in our PowerRatings Charts that traders can use to both see how stocks come to earn high Short Term PowerRating, as well as how scanning for low Short Term PowerRatings can help traders anticipate pullback opportunities.

In the example of Osiris Therapeutics Inc. (OSIR | Quote | Chart | News | PowerRating) above, which has a Short Term PowerRating of 10 and a 2-period RSI of 2.45, traders can see how OSIR's PowerRatings were downgraded in the second half of September after the stock broke out of a sideways consolidation range. Low Short Term PowerRatings are "consider avoiding" signals that many traders use to help identify short selling candidates. But as the PowerRatings chart shows, low Short Term PowerRatings are also a helpful way of spotting stocks that are increasingly likely to pull back and provide buying opportunities.

One of our points of emphasis with regard to Short Term PowerRatings is that the deeper the pullback, the greater the "snap back" when buyers return to the stock. An example of this can be seen in the PowerRatings chart of Stewart Enterprises (STEI | Quote | Chart | News | PowerRating), which has a Short Term PowerRating of 9 and a 2-period RSI of 1.13.

While STEI earned a PowerRatings upgrade to 8 in mid-August, this upgrade was not accompanied by a significant move lower in price. Compare this to the PowerRating upgrade to 8 that occurred in mid-September - specifically, September 17. Within a day, the stock had rallied from a close of 8.42 on the day of its upgrade to a close of 9.36 for a gain of more than 11%.

The last PowerRatings chart I want to consider is the chart of Cryolife Inc. (CRY | Quote | Chart | News | PowerRating), which also has a Short Term PowerRating 9.

The PowerRatings chart fo Cryolife shows both of the features of our Short Term PowerRatings that I mentioned above. We see how low Short Term PowerRatings in mid-August anticipated a short term pullback (CRY went from 14.24 on August 24th to 16.32 on September 2, five days later), as well as how another series of low Short Term PowerRatings helped traders prepare for an even steeper pullback in the first half of September.

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 Editor in Chief at TradingMarkets.com.