Volatility, PowerRatings and Swing Trading: ALO, UST, SQNM, MDVN, QCOR

Extreme volatility saw the markets race higher and sink lower on Friday, finishing the session modestly lower.

The past few days have been a momentum trader’s dream. While such moves in futures and forex are not uncommon, stocks in general are unique for two reasons: (1) the tendency to revert to the mean and (2) the tendency to move within a range.

These two aspects of stock price behavior – especially in the short term – have helped guide our approach to trading. By looking to buy stocks after they have fallen and looking to sell stocks after they have rallied, we stand to take advantage of the most pronounced tendency in stock price behavior. It is an edge that traders – particularly professional traders – have known and practiced for decades.

It is the key to the most effective use of our Short Term PowerRatings, as well.

Sometimes, when volatility is low, these two factors are not sufficient to make for easily profitable trading. When stocks do not stray far from the mean – or the range in which the operate is small – traders who buy low and sell high often have to accept lower returns or greater risk, often through increased size.

What do traders do in the opposite situation, when stocks stretch far from their means and the range they appear to travel in grows large?

Here, in such high volatility environments, traders should do the opposite of what they might have done in low volatility environments. This may mean decreasing positions size to account for the greater volatility. It may even mean taking partial profits on positions as they move into profitability on an intraday basis rather than on the close.

Alpharma Inc. (ALO | Quote | Chart | News | PowerRating) Short Term PowerRating 10. RSI(2):2.58
UST Inc. (UST | Quote | Chart | News | PowerRating) Short Term PowerRating 10. RSI(2): 0.394
Sequenom Inc. (SQNM | Quote | Chart | News | PowerRating) Short Term PowerRating 9. RSI(2): 8.14
Medivation Inc. (MDVN | Quote | Chart | News | PowerRating) Short Term PowerRating 9. RSI(2): 10.33
Questcor Pharmaceuticals (QCOR | Quote | Chart | News | PowerRating) Short Term PowerRating 9. RSI(2): 19.89

One of the most important things that swing traders can do is to stick with the highest Short Term PowerRatings stocks and/or those with the lowest 2-period RSIs. These are the stocks that already have been supersaturated with selling pressure – so much so that often all those inclined to sell that stock have already done so, paving the way for buyers to re-enter the market for shares.

Of the five stocks in today’s report, three have Short Term PowerRatings of 9 and two have Short Term PowerRatings of 10. Stocks with Short Term PowerRatings of 9, according to our research, have outperformed the average stock by a margin of more than 13 to 1 after five days. Stocks with Short Term PowerRatings of 10 have outperformed the average stock by a margin of nearly 17 to 1 after the same time period.