Using RS Scans: When a Loser is Your Best Opportunity
I often get questions about my RS Scan and how I use them. I cringe when I here someone looking at them in a binary way. Buy the gainers and sell the losers. That may work when using a 6 or 12 month time period as most do, but since my calculations are a faster than most (3mo explained here), it warrants a little different approach. Sure, I find many winners on the RS Gainers list and losers on the RS Losers list; however I often find some of the best opportunities looking for the opposite. Looking for potential shorts on the RS Gainers list and longs on the RS Losers list. Lets look at an example of this I found in last nights list. (By the way, I found many of these in last nights list, so it might be worth a closer look after reading this.)
Below is last nights RS Losers list with $NBR (Nabors Industries) highlighted.
As we can see $NBR was at the bottom of the list a quarter ago with an RS of 2. After a big run off the lows it ran all the way up to an RS of 89 just 5 days ago. Only to fall back to 51 on last nights list. That is a 38 point drop in 5 days, a lot by my measures. If we only had the list to look at that might be worrisome, but luckily we have charts to clear the picture. I look at all the charts on both list each night and this one really jumped out at me.
The first thing I notice was the large drop off February highs cutting over 40% off the value. Then a 2.5 month base breakout in late July ran about 14% higher before running out of steam at a previous support turned resistance spot not marked on the chart, but you can see it to the far left. It has now dropped 8 trading days in a row and is right back at the breakout zone. Of course, it could fall further, but the weight of the evidence suggests the risk reward might be with the buyers at least in the short term. Why?
1. 8 down days in a row with the last two having long tails
2. Sitting on the previous breakout level
3. Nice Volume contraction on the way down
4. 50% retracement of the move off the lows (not shown)
5. RSI held its bull range during the fall
6. CFG is at -17 (anything under zero is oversold)
All this adds up to a good risk reward in my opinion. Combine that with a trading plan an good risk management and $NBR looks like a great setup to me. Each person has a style for entry, my personal preference is a move over yesterdays highs. That said, it is your money, so you need your own plan.
I hope this post give some of you new ways to look at these scans. I often tell people these are not buy or sell list, they simply point out unusual moves over the last 3 months as compared to the rest of the GT500 universe I use for the list. It is just a starting point, but I contend they offer plenty of opportunities every day if you are willing to do the work to find them.
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(All market data above are derived from Stockcharts.com, Esignal, and Reutersdatalink)
