PowerRatings Danger Zone: 3 Overbought Stocks for Traders
With the Dow industrials down more than 130 points and the Nasdaq giving up more than 1% on Wednesday, it is still possible for traders to find the right kind of stocks to bet against?
In the same way that bullish markets tend to encourage traders to chase stocks higher, bearish markets provide too many traders with compelling reasons to follow stocks lower.
This approach is the hallmark of trend trading — and of most swing trading styles, as well. And enough traders have made enough money pursuing these trading methods that we are not going to quibble with what works for them. The question is: does this approach to trading work for you?
One thing that is relatively unique about our approach to trading stocks is that we take the truism of buying weakness and selling strength seriously. Whenever we are looking to buy a stock, the first question we ask — after ensuring that the stock is indeed a strong stock, a stock trading above its 200-day moving average — is this: is the stock on sale? Is the market, essentially, giving the stock away?
We observe this in the form of stocks that are very oversold, or stocks that have fallen 10% or more in only a few days, or stocks that have experienced multiple consecutive down days or lower lows. All of these are clues that a strong stock has fallen too far, too fast, and may be due to resume its previous upward movement.
The same is true for traders looking to wager against stocks — only in reverse. Here, after making sure that the stock in question is a weak stock, a stock trading below its 200-day moving average, we want to know: is this a stock that the market has overvalued? Is there too much enthusiasm, too much giddiness in the stock — particularly given its trading below the 200-day moving average?
And the clues are similar, as well, only in reverse. When betting against stocks, we look for stocks that are very overbought, or stocks that have rallied 10% or more in just a few trading sessions. We look for multiple consecutive higher highs or up days — all of which, according to our research, are indicative of weak stocks that are vulnerable to a return to their downwardly trending ways.
The stocks in today’s report fall into this latter category. Not only are all three trading below their 200-day moving averages, but also these three stocks have 2-period RSI values of more than 90 — another true “tell” of an overbought stock.
Flotek Industries Inc.
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PowerRating) Short Term PowerRating 2. RSI(2): 99.09
Innerworkings Inc.
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INWK |
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PowerRating) Short Term PowerRating 2. RSI(2): 67.81
Nymex Holdings
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PowerRating). Short Term PowerRating 2. RSI(2): 93.53
Of the three stocks here, Flotek Industries stands out as the most compelling of this overbought set. Flotek shares the same low, Short Term PowerRating as both Innerworkings Inc. and Nymex Holdings. But what truly catches the eye is the fact that Flotek Industries has a 2-period RSI of more than 99. This represents an extremely overbought situation which, when it occurs below the 200-day moving average, is among the best ways for traders to identify stocks that may be profitably sold short.
A quick note. Innerworkings Inc. is shown with a 2-period RSI of only 67.81. Know that the stock actually began the day with a 2-period RSI of more than 94, and there was just enough selling in the stock to allow INWK’s RSI — and its overbought condition — to ease somewhat.
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