Short Term Trading Strategies That Work: Has Tech Rallied Too Far Too Fast? (GOOG, MSFT, DELL, CSCO, ROM)
Looking for a sector to credit for the current rally in the markets? Look no farther than technology.
From the ^XLK^ to the ^TYH^, traders and investors have been piling into technology stocks, sending technology-based exchange-traded funds like these soaring into overbought territory below the 200-day moving average.
Above: Another example of an overbought technology fund is the extremely overbought ^ROM^, which continued to climb on Wednesday.
These overbought conditions are as apparent in the stocks of the technology sector as they are in the exchange-traded funds. Taking a look at the stocks of the S&P 100, for example, there are 12 stocks coming into Wednesday that were overbought below the 200-day moving average. Of those 12 stocks, fully half of these stocks are either in the technology or telecom sectors.
Let’s take a look at some of these stocks, which could become good candidates for high probability traders looking for markets that may have run too far too fast to the upside and potentially be vulnerable for a short term reversal.
With a 2-period RSI of well over 99 early in trading on Wednesday, shares of Cisco are among the more overbought in a sector of very overbought technology stocks.
Cisco has closed higher for six consecutive trading sessions leading into Wednesday, and is more overbought below the 200-day than it has been at any time since falling below the 200-day moving average in late May.
Also with a 2-period RSI of more than 99 early in Wednesday’s trading session is computer-maker Dell.
Dell has closed higher for four out of the past five trading days, and is moving strongly higher intraday on Wednesday. Dell has been in overbought territory before. The stock traded at overbought extremes for three days in mid-June. Five days after the final overbought close, Dell had dropped by nearly 9%.
Also overbought below the 200-day moving average are shares of ^HPQ^.
Internet giant Google has been trading below its 200-day moving average since late April. But the current rally is the first time the stock has been truly overbought below that level since dropping into “bear market” territory below the 200-day this spring.
Google has closed higher for five consecutive trading days leading into Wednesday’s trading. The current rally in Google comes after several days of exceptionally aggressive selling.
Closing higher for seven out of the past eight trading days, Microsoft was likely one of the first technology stocks to begin attracting trader and investor interest during the sharp downturn that ended June.
As with many of the other stocks in today’s report, MSFT has not been often overbought below the 200-day moving average of late. That said, both previous times MSFT has tipped into overbought territory below the 200-day, in early June and again in mid-June, a significant sell-off has followed.
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David Penn is Editor in Chief at TradingMarkets.com.