With the Nasdaq 100 finishing higher by more than 2% on the first trading day of the year, traders are understandbly focused on what’s going up. But some of the stocks that are moving lower and actually becoming more oversold may be where attention is truly merited.
As a growing number of active investors are coming to realize, the stocks pulling back today are typically the stocks that are making the new, short-term highs if not tomorrow, then often within the next week. This is why so many professionals spend more time studying the stocks that others are discarding, rather than the stocks that already have been bid into overbought status.
This doesn’t mean traders need to forage around in the scrap heap for stocks, either. A stock like O’Reilly Automotive (NASDAQ: ORLY) that is pulling back by more than 2% ahead of trading on Wednesday after rallying to 52-weeks highs is the kind of stock that has historically attracted buyers as it has moved lower and become oversold. Consider how the stock traded during its last stretch through oversold territory in mid-November, rallying for five days in a row for a gain of almost 5%.
The pullback of more than 2% in ORLY has sent the stock into technically oversold territory, as well as to 10-day closing lows ahead of trading on Wednesday. The stock has a short-term, positive edge of more than 1% and a 7 out of 10 rating that puts ORLY at the higher end of neutral.
Another example of profit-taking after rallying to significant, new highs is the two-day pullback in Starbucks Corporation (NASDAQ: SBUX).
SBUX pulled back by more than 1% on Tuesday, taking the stock from overbought territory to near oversold territory in just two days. In fact, if the stock continues to sell-off, it will almost certainly trade oversold before the end of the week.
Starbucks has a neutral rating and a small positive edge of just under half a percent as of Tuesday’s close.
It took me a visit to a Walmart in Tucson to finally show me why retailers like Dollar Tree Stores Inc. (NASDAQ: DLTR) were so successful. Pulling back after rallying to new, 52-week highs in the closing days of 2011, shares of DLTR have closed lower for three out of the past four trading days, and are nearing technically oversold levels above the 200-day moving average.
DLTR has been rangebound for nearly a month and a new, short-term closing low in the stock would likely represent a break in that weeks-long consolidation pattern.
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