Up, Up and Overbought

No wonder traders get a bad rap of being cold and calculating. No sooner than the Dow rallies 400+ points and here we are looking at stocks that have moved too far too fast.

Given the rough character of the markets in recent months, traders could hardly be faulted for celebrating a bit yesterday, as the markets responded with something akin to ecstasy to the news that the Federal Reserve was providing $200 billion worth of additional liquidity.

But when those markets remain under pressure, still unable to rally above their 200-day moving averages, traders know that--euphoria of the rally notwithstanding--such rallies need to be taken with a grain of salt. While it is true that eventually the markets will rally up to and close above their 200-day moving averages, traders are best served waiting for that moment to arrive before changing their trading strategy from one of caution to one of aggression.

In other words, we are still looking to buy strong stocks and to sell weak stocks whose weakness may have been obscured by the most recent broad-based market rally.

One of the ways we look for weakness in stocks is to search for stocks that, while trading below their 200-day moving average, have been up for five or more consecutive days. When both conditions are present, our research into short term stock movement suggests that stocks are likely to underperform in one-day, two-day and one-week timeframes.

While stocks that are higher day after day tend to make traders feel bullish, it is worth remembering that the goal of trading is to be in the stocks BEFORE they begin their run of consecutive up days. After stocks have been up day after day, particularly when those stocks are under the pressure of trading below their 200-day moving average, traders know that the proper attitude toward these stocks should be one of selling rather than buying.

Click here to read our research into stocks that have rally for five or more consecutive days.

Traders can find technical indicators like this one at our TradingMarkets Stock Indicators page. We have 16 different technical indicators all geared toward helping traders discover which stocks are truly oversold and ready to move higher and which stocks are truly overbought and ripe for reversal.

All three stocks in today's discussion have been up for five or more consecutive days--and we suspect that Tuesday's rally made many traders all the more likely to want to stick with these names. But veteran traders know that when weak stocks--stocks that are trading below their 200-day moving averages--start rallying, it is time to start selling.

Pike Electric (PEC | Quote | Chart | News | PowerRating). Short Term PowerRating 3. RSI(2) 98.60

Thomson (TOC | Quote | Chart | News | PowerRating). Short Term PowerRating 3. RSI(2) 97.35

United Community Banks (UCBI | Quote | Chart | News | PowerRating). Short Term PowerRating 3. RSI(2) 99.18

Even in the short term, trading stocks successfully when markets are volatile can be difficult and confusing. Help get and keep your trading on track with a copy of our special, Free Report, "5 Secrets to Short Term Stock Trading Success." We'll show you how to combine our powerful Short Term PowerRatings with methods and strategies to make sure you are buying stocks when they are on sale and selling stocks when there are lines around the block full of bidders looking to buy. Click here to request your copy today--or call us at 888-484-8220.

David Penn is Senior Editor at TradingMarkets.com.