3 Overbought Energy Stocks for Traders
When a market bounces off the lows, or rallies after sessions of selling, there are two tasks traders should begin.
The first task is to determine which stocks are still in a bullish mode and which stocks are still in a bearish mode. As traders, we use the 200-day moving average as a simple screen to separate healthy, bullish stocks from unhealthy, bearish ones. Those stocks that are trading above the 200-day moving average are potentially buyable. Those stocks that are trading below the 200-day moving average are potentially sellable or shortable.
The second task is to see if any of those bullish stocks are oversold and if any of those bearish stocks are overbought.
Ideally, we want to buy oversold stocks that are above the 200-day moving average and sell or short overbought stocks that are below the 200-day moving average. Often, these opportunities become clear when markets make bottoms
— even temporary ones — and begin to move higher.
If the bounce in the broader market succeeds, then oversold stocks are likely to move higher. Overbought stocks often move higher as well or, at a minimum, tend to hold their ground. If the bounce fails, it is overbought stocks that are most vulnerable to declines. At the same time, oversold stocks tend to move lower or sideways.
Knowing this provides some good guidance for trading. We cannot know if the bounce that began on Black Friday, for example, will be sustained. But we can look at types of stocks
— such as overbought stocks trading below the 200-day moving average — and understand what opportunities these stocks may bring if the bounce does not succeed.
Looking at one of our
TradingMarkets Stock Indicators, we see that one of the best tools for determining overbought and oversold markets is the 2-period Relative Strength Index, or 2-period RSI. This indicator
— used by technical traders for decades — has been modified by our research so that it is a much more effective and efficient tool for traders looking to enter and exit the market in a relatively short time frame.
(Click here to read more about trading with the 2-period RSI.)
Specifically, what we are looking for in an overbought or oversold market is a 2-period RSI that is either above 98 for an overbought market or below 2 for an oversold market. And, again, we are only interested in overbought markets that are below the 200-day moving average and oversold markets that are above the 200-day moving average.
Focusing on overbought markets that are below the 200-day moving average, there are a number of stocks worthy of further investigation. Three such stocks
— Basic Energy Services
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PowerRating), Hawaiian Electric
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PowerRating) and
Magellan Midstream Holdings
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PowerRating) — all hail from the Energy industry
— and feature relatively low PowerRatings (for Traders) ratings of 3. And all three of these stocks have 2-period RSI readings in excess of 98.
Our research going back to 1995 shows that there is a short-term edge in selling or shorting overbought stocks that are below the 200-day moving average. We have found that these stocks have provided negative returns in one-day and one-week timeframes. This places these stocks among the best candidates for traders looking to exploit short-term strength (the stocks’ overbought condition and sky-high RSI) in a context of greater weakness (the stocks´ position below the 200-day moving average).
Three Overbought Energy Stocks for Traders Recap:
Basic Energy Services
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BAS |
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PowerRating). PowerRatings (for Traders) rating: 3
Hawaiian Electric
(
HE |
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PowerRating). PowerRatings (for Traders) rating: 3
Magellan Midstream Holdings
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MGG |
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PowerRating). PowerRatings (for Traders) rating: 3
David Penn is Senior Editor at TradingMarkets.com