TradingMarkets Monday Stock Movers

Stocks opened up overbought on Monday morning, following an end-of-the-week rally that brought stocks up to their highest levels since stocks started moving sideways in the second half of July.

Of the major markets, the most overbought stocks appear to be the blue-chips of the Dow industrials - though stocks in the S&P 500 and Nasdaq are also beginning to show signs of fatigue. Generally speaking, the markets have been a story of rising financials and technology stocks alternating with days during which energy stocks rebound and move higher. The S&P 500 in particular has been tied to the fortunes of financial stocks while strength in tech stocks has helped the Nasdaq advance.

Arthrocare Corporation (ARTC | Quote | Chart | News | PowerRating) Short Term PowerRating 1. RSI(2): 99.69

As swing traders, where does this leave us? Overbought markets, as far as we are concerned, are for taking profits and, when the opportunities present themselves, selling stocks short. Being a swing trader means, among other things, that your trading is in tune with the rhythms of the market: buying stocks when they become cheap and selling stocks when they become expensive.

True enough, stocks that are cheap can become cheaper and stocks that are expensive can become more expensive. But our study of stock price behavior, particularly in the short term, indicates that stocks over time alternate between being relatively cheap and relatively expensive. Successful swing trading takes advantage of these tendencies in stock price behavior over and over again.

Dynamic Materials Corporation (BOOM | Quote | Chart | News | PowerRating) Short Term PowerRating 2. RSI(2): 99.15

Today's report includes three stocks that have moved toward overbought extremes in recent days. All have Short Term PowerRatings of 1 or 2, putting them in that category of stock that has underperformed the average stock by significant margins within five days. In addition to having low Short Term PowerRatings, all three stocks have 2-period RSI values of more than 99.

We found that stocks with 2-period RSI values of 98 or more - and were trading below the 200-day moving average - produced negative returns in one-day and one-week timeframes. This factor, when combined with low Short Term PowerRatings, makes for a compelling list of potential short candidates for traders looking to take advantage of markets that are overextended to the upside.

Ladish Company Inc. (LDSH | Quote | Chart | News | PowerRating) Short Term PowerRating 2. RSI(2): 99.63

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.