This week’s edition of 7 Stocks You Need to Know features overbought stocks below the 200-day moving average, oversold stocks above the 200-day moving average, and a pair of potential “special situations” in the form of exceptionally oversold stocks that a growing number of traders are starting to talk about.
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Let’s take a look at the stocks.
Among those stocks that have become especially overbought going into trading on Monday are a pair of Do-It-Yourself, home repair retailers in ^HD^ and ^LOW^ (below)
Shares of Lowe’s Companies have closed higher for three out of the past four trading days, as the stock has climbed into overbought territory below the 200-day moving average. Four consecutive higher closes have paved the way for Home Depot’s entry into overbought territory below the 200-day. In fact, Home Depot is as overbought now as it has been in more than a month.
Also overbought below the 200-day are shares of ^HAL^. Halliburton has traded in a range since mid-August and the stock’s 4% move on Friday brought HAL to within cents of its 200-day moving average.
There are a number of financial companies that are not quite as overbought as Home Depot, Lowe’s and Halliburton, but will almost certainly enter overbought territory below the 200-day on additional follow-through to the upside.
Among these financial companies are ^AXP^, ^COF^ (below) and ^BK^.
Recent strength has not left many stocks oversold above the 200-day moving average. One stock that does fall into this category is ^PEP^, which has closed lower for three out of the past four trading days. Shares of PEP are as oversold as they have been since late June, when the stock rallied from a closing low just under $61. Even with PEP’s recent pullback the stock trades north of
$64 as of Friday.
I mentioned at the beginning a pair of potential “special situations.” These are potential trading opportunities that, while not part of the standard high probability trading principles, still can be pursued by advanced traders looking to leverage the mean reversion tendency in stocks when those stocks reach truly extreme levels.
With 2-period RSIs of less than 6 for ^GS^ and less than 2 for ^HPQ^ (above), traders should not be surprised if either or both of these stocks attracts buyers over the next few days. Because both Goldman Sachs and Hewlett-Packard are trading below their 200-day moving averages, neither stock represents a valid high probability trading opportunity.
But for traders looking to take on additional risk in markets that are in fact oversold, keeping an eye on Goldman Sachs and HP may be worth doing for a small, subset of advanced, aggressive mean reversion traders.
With 16 backtested strategies for trading bull markets, bear markets and sideways markets, Short Term Trading Strategies That Work by Larry Connors and Cesar Alvarez may be the most important trading book you read this year. Click
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David Penn is Editor in Chief at TradingMarkets.com.