3 Overbought Stocks for Traders: NTLS, OMCL, OVTI

March 3, 2008
David Penn

The number of overbought, low PowerRating stocks has subsided, but there are still plenty of high-flying stocks that haven’t yet gotten the message of the market’s current pullback.

This means that while all three of these stocks have performed impressively over the past few days, the likelihood that the good times will continue in these names is increasingly weak.

There are two kinds of stock that short-term traders should be interested in. Strong stocks making pullbacks and weak stocks making bounces. Regardless of whether or not the broader market is advancing or declining, sticking to this basic rule will go a long way toward making sure that traders remain on the right side of the market. This is also the key to success when it comes to short-term trading.

Strong stocks are defined simply as those stocks that are trading above their 200-day moving average. Weak stocks, by contrast, are generally those that are trading below their 200-day moving average.

What short-term traders do in order to make the sort of high probability trades that lead to long-term trading success is to look for instances when strong stocks, stocks above their 200-day moving averages, are moving lower. Short-term traders look to place limit order below the close of these falling stocks, positioning themselves to take advantage of softness in the prices of otherwise strong stocks.

Conversely, short-term traders look to put limit order above the close of weak stocks that are bouncing below their 200-day moving averages. This strategy helps traders sell short weak stocks when they are often at their most expensive.

What specifically can traders use to spot, for example, the atypical and suspect strength of weak stocks? One criteria that has worked for us is to look for stocks that are trading below their 200-day moving averages, but have advanced by 10% or more in the past five days. Our research, looking at thousands and thousands of simulated trades, reveals that these kinds of stocks actually underperform the average stock in one-day, two-day and one-week timeframes-making these stocks attractive candidates for short selling.

Click here
to see our research into stocks that are up 10% in the past five days.

All three of the stocks in today’s discussion are exactly the sort of low PowerRating, overbought stocks that can make for excellent opportunities for trading to the downside. Not only do all of the listed stocks have PowerRatings of 2, decidedly in the “consider avoiding” category of stock, but all of these stocks also have 2-period Relative Strength Index values of 98 or higher. The 2-period RSI is another important indicator we use to gauge truly overbought and oversold conditions in stocks and in the market in general.

NTELOS Holding Corp.
(
NTLS |
Quote |
Chart |
News |
PowerRating).
PowerRating 2. RSI(2) 99.09.