A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
Buying a Pullback on Jardin (JAH)
12/03/2009 12:01 am EST
I was watching Jim Cramer's Mad Money the other night. I've been a Cramer fan since the days before the radio show (What? You don't remember the radio show?), and I'd gotten out of the habit of watching him.
Cramer had on the CEO of Jardin (JAH). After watching the interview, I decided to take a look at the chart of Jardin. How would this company's stock have looked to a high-probability swing trader—perhaps a student or graduate of the TradingMarkets Swing Trading College—in the days leading up to the CEO's appearance on Cramer's show?
What I found was an excellent example of how buying after a pullback—"buying the selling," as Larry Connors calls it— continues to be a winning trading strategy for short-term traders.
One of the easiest ways to spot an extremely oversold stock—a stock that, according to our research, has made significant gains in the short term—is to look for a two-period RSI of less than two. If that stock with the two-period RSI of less than two is also trading above its 200-day moving average, then you've got a stock worth paying attention to.
Here's what makes "buying the selling" so powerful as a short-term trading strategy. Not only do we wait for a stock to reach extremely oversold conditions, but also we want the stock to pull back even more on an intraday basis.
How much more do we want the stock to pull back? That is up to the individual trader, with intraday pullbacks as modest as 2% and as great as 7%, both working well in our simulated testing going back to the mid-1990s. In the example of Jardin, I used a 3% intraday pullback based on the close below the two-period RSI. That means that with a close of 27.58, my theoretical limit order would be at 26.75.
That trade would have been filled two days later on November 27. And two days after that, based on a sound exit strategy, this trade would be exited for a short-term gain of 4.89%.
This is what high-probability trading is all about: Waiting for pullbacks, entering on intraday weakness at oversold extremes, and exiting on strength. And from this core concept, a wide variety of short-term trading strategies have been developed using not just stocks, but also exchange traded funds (ETFs), options, and e-mini index futures.
By David Penn, editor in chief, TradingMarkets.com
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