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This Relative Strength Play Is Ready to Explode

 DELAFIELD, Wis. (Stockpickr) -- Lots of people freak out whenever markets are dropping like they are right now -- but not me. I get ridiculously excited!

>>5 Hated Earnings Stocks You Should Love

The reason I get excited when markets are getting hit hard by the bears is that when your trading screens are a sea of red, it's very easy to identify strong names that aren't being hit in the overall market weakness. These strong names are displaying relative strength, which is simply a measure of how strong a stock is compared with the overall market. The thinking here is that if the bears can't take a stock down when they're in full control of the markets, then that stock has potentially exhausted its sellers and the buyers are in control.

Wall Street has conditioned traders and investors to buy stocks that are going down during big market corrections. That strategy is not a wise one, unless the stock has found a bottom and has finished its downtrend. If you buy a stock that's displaying relative weakness in market drops, then you're going to get caught trying to catch a falling knife. A better way to approach market corrections is look for the stocks that aren't going down and are displaying relative strength. These names are often setting up to be the next big movers and for good reason: They have buyers.

>>3 Huge Stocks on Traders' Radars

A perfect example of this can be seen in the performance of Agios Pharmaceuticals (AGIO) today, which is soaring higher by 24% to over $44 a share. On Friday, as the market was hammered lower, shares of AGIO actually closed higher at $35.48, back above the stock's 50-day moving average of $35.03 and well above its intraday low of $31.42 a share. Now, to be fair, AGIO had big news today after the company reported that its blood cancer drug, AG-221, showed promising clinical activity. That said, it still wasn't going down on Friday, which was a signal that the stock had real buyers.

Other stocks hitting my scans that aren't going down on this solidly red day include American Apparel (APP), Acorda Therapeutics (ACOR), Sarepta Therapeutics (SRPT), Questcor Pharmaceuticals (QCOR) and J.C. Penney (JCP). All of these stocks are displaying relative strength intraday, so traders should now keep a close eye on how they close to see if the bulls remain in charge.

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