September 16, 2010
One of the more impressive moves in Friday’s market was the rally of more than 7% by Oracle Corporation (ORCL | PowerRating), which reported earnings Thursday after the market close. As discussed below, the rally puts ORCL at a potentially significant level in terms of the stock’s historical behavior after a strong move higher.
Overall, equity movement was modest on the final trading day of the week, with the S&P 500 (basis the SPDR S&P 500 ETF (SPY | PowerRating)) off by fractions of a percent.
Here are 7 Stocks You Need to Know for Monday.
Moving higher late in trading on Friday and becoming increasingly overbought below the 200-day moving average are a pair of popular, consumer technology stocks in Research In Motion Ltd (RIMM | PowerRating) and Google (GOOG | PowerRating) (below).
RIMM has been noted in recent 7 Stocks columns as a stock that was moving deeper into territory from which it has historically reversed. As for Google, the stock has closed higher for four out of the past five trading days below the 200-day moving average and is trading at its highest level since mid-August.
Also moving higher into overbought territory below the 200-day are shares of MasterCard Inc (MA | PowerRating).
Mastercard has closed higher for four consecutive trading sessions and is closing in on a new short term high.
Although there are few stocks in oversold territory above the 200-day moving average for high probability traders looking to buy weakness and sell strength, there are some interesting pullbacks that could potentially turn into opportunities if sellers take control of the market early next week.
Among these pullbacks is the slide by shares of Starbucks Corporation (SBUX | PowerRating).
SBUX dropped by less than 1% on Friday. But Friday’s close marked the third straight day that the stock closed lower. Additional weakness in Starbucks, provided the stock remains above its 200-day moving average, could represent an opportunity on the long side for mean reversion traders.
Also moving lower above the 200-day late on Friday are shares of Chevron Corp (CVX | PowerRating). In many ways, the price action in CVX resembles that of SBUX insofar as prices as a whole are moving more sideways than sharply lower over the past few days. Again here, more aggressive selling likely will encourage traders to put CVX on their watchlist as a potential high probability trading candidate.
I mentioned Oracle Corporation at the beginning of the column. Shares of Oracle have been trading in or near overbought levels ever since the stock broke out above its 200-day moving average last Tuesday. And while this may tempt short term traders to pile into the “hot market”, our research into short term stock price behavior reminds us that stocks have tended to underperform after making new short term highs rather than outperform.
This is one of the key conclusions from our quantified research into the short term behavior of equity markets – including exchange-traded funds based on equities. High probability traders likely would be better off waiting for a pullback in a stock like ORCL than they would be in chasing the stock higher.
The most interesting stock reporting quarterly earnings on Monday may be Lennar Corp Cl A (LEN | PowerRating). Shares of LEN are still in retreat from a recent overbought bounce below the 200-day moving average. Should the company’s earnings report heartened traders on Monday and Tuesday, be on the look out for the possibility of newly overbought conditions in the stock by midweek.
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