Into Thin Air: 5 Overbought Stocks for Traders

February 1, 2008
David Penn

When markets are under pressure, the opportunity to bet against weak stocks experiencing temporary strength is always just around the corner. Here are five stocks whose movement higher in recent days may have made them ripe for reversal.

Traders can use our TradingMarkets
Stock Indicators to find the sort of conditions that lead weak stocks that have been moving higher to stall, reverse and resume their weak ways by moving lower once again. Much of the research that helped develop these indicators is counter-intuitive. We found that, for example, weak stocks do not respond to consecutive highs, or overbought conditions or large percentage moves higher in the same way that strong stocks do. In the short-term, weak stocks–stocks that are trading below their 200-day moving average–tend to perform poorly after making multiple consecutive highs, after becoming overbought, and after making large percentage moves to the upside. And this can be powerful information for traders studying the market for opportunities to bet against stocks.

While any one indicator or condition can be enough to support a trade, traders can gain an edge by looking to see which stocks appear on more than one indicator screen. If one indicator, for example, suggests that a stock is overvalued, or has moved too high too fast, then that is one thing. But if a second or even a third indicator confirms the vulnerability of a given stock, then a trader has that much more assurance that the stock in question is one that often can be profitably traded–in the case of overbought stocks–to the downside.

In this discussion, I have looked for overbought stocks that fit at least three different indicators that spot overbought conditions.
This meant the resulting list of stocks would have a high likelihood of reversing and moving lower in the near term compared to the average stock. The three conditions I used were: RSI values of 98 or more, stocks that were up 10% or more, and stocks that had five or more consecutive higher highs. Again, on an individual basis, all of these indicators alone can help traders spot opportunities. By combining these three conditions into a sort of super indicator, my plan was to both limit the number of stocks to be considered, as well as ensure that the eventual results would be among the most vulnerable stocks in the market right now.

Traders unfamiliar with our TradingMarket Indicators and the research that went into building them, should read some of the free material we have published here at TradingMarkets. These articles go a long way toward helping explain how our TradingMarkets Indicators have been developed, and how traders can most profitably use them.

Click here
to read our research on trading the 2-period Relative Strength Index (RSI).

Click here
to read our research on trading markets that have been up (or down) 10% or more.

Click
here to read our research on trading markets that have made multiple consecutive highs (or lows).

As an additional screen, all five of the stocks that made the final list have PowerRatings of 1. 1-rated stocks are far and away the least attractive stocks for traders to bet on in the short-term and, rather, tend to be among the best candidates for shorting. I have also listed the specific 2-period RSI values for each stock to help traders further discriminate among the five opportunities listed here. Higher values suggest a more overbought stock.

Arkansas Best Corp.
(
ABFS |
Quote |
Chart |
News |
PowerRating) RSI(2): 98.98