If a market is in a long term uptrend, then the swing trading philosophy of buying weakness and selling strength means buying markets after they have pulled back and become oversold, and then selling those markets after they have rallied.
So what would the same swing trading philosophy suggest as a strategy when dealing with a long term downtrend?
If you guessed "selling (short) strength and buying (back, or covering) on weakness," then congratulations! You're exactly correct.
This is especially worth keeping in mind as a number of stocks that have become beaten down in recent days begin to advance - strongly and aggressively in many instances. As short term sentiment begins to shift from fear of losing money to a fear of being left out of the next big rally, the temptation to jump onboard one of these stocks making big moves below its 200-day moving average will be great.
Statistically speaking, it has also turned out to be a mistake.
If you're looking for quantified information, statistically-backed data on when to buy stocks AND when to sell stocks short, then the link below to learn more about the TradingMarkets Swing Trading College presented and hosted by Larry Connors, founder and CEO of TradingMarkets and Connors Research.
The Dow Jones industrials finished higher by more than 200 points ahead of trading on Tuesday, closing up for a third day in a row and moving into overbought territory for the first time in more than a month. Leading the Dow higher were Bank of America (noted below), as well as oil stocks like Chevron Corp (CVX | PowerRating ) and Exxon Mobil Corporation (XOM | PowerRating ) , both of which gained more than 3%.
Here are 7 Stocks You Need to Know for Tuesday .
Closing higher for a third day in a row, shares of Research In Motion Ltd (RIMM | PowerRating ) lead the Nasdaq 100 higher on the first trading day of the week.
The gain of more than 10% in RIMM puts the stock in overbought territory below the 200-day movng average.
Traders are in a selling mood as the market absorbs news of the decision by Google (GOOG | PowerRating ) to acquire MMI (MMI | PowerRating ) . Shares of Google were down more than 1% while shares of MMI soared by more than 55%.
What's down on an up day? Shares of Baidu, Incorporated (BIDU | PowerRating ) sold-off in the wake of the stock's big gains last week to close lower by more than 3%.
Up sharply below the 200-day moving average but not yet in overbought territory ahead of trading on Tuesday were shares of Bank Of America Corp (BAC | PowerRating ) . Shares of BAC gained nearly 8% in Monday's session.
Both Home Depot Inc (HD | PowerRating ) and Wal-Mart Stores Inc (WMT | PowerRating ) are scheduled to announce quarterly earnings on Tuesday. Traders were especially active in the markt for HD shares, sending the stock higher by well over 2% for a third consecutive higher finish.
Note that both Home Depot and WalMart are trading below their 200-day moving averages.
Click here to get 7 Stocks You Need to Know delivered for free every evening after the market closes.
David Pennis Editor in Chief of TradingMarkets.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.