Stock Trading: Overbought Markets and the 200-Day Moving Average
In yesterday’s 7 Stocks You Need to Know Stock Trading column, I noted that stocks that had rallied for multiple days in a row and were trading below their 200-day moving averages may be more susceptible to selling once profit-taking begins to set in – as it always does.
So far, the performance of the banks at midweek is a testament to this observation. As noted below, banks like Wells Fargo, Citigroup and Goldman Sachs had all become overbought below their 200-day moving averages. And as of Wednesday, these stocks were all selling off in earnest.
As Larry noted in Short Term Trading Strategies That Work: A Quantified Guide to Trading Stocks and ETFs:
Yes the world looks great, yes the news is wonderful, and yes there’s lots of excitement out there. But unless you have some superior exit strategy, you will likely have a very tough time making money buying the highs over the long run.
You can read the rest in Chapter 2 of Short Term Trading Strategies That Work (if you don’t own a copy, you can get one for free here – paperback or pdf).
The banks will one day rise again, to steal a phrase. But until they rise above their 200-day moving averages, high probability stock trading strongly suggest that traders keep away from these stocks, especially when they become overbought.
7 Stocks You Need to Know for Thursday.
Within the pullback among steel stocks, a pullback that has taken shares of ^X^ lower by more than 3% and shares of ^ATI^ down for a fourth day in a row, shares of ^AKS^ continued to remain strong above the 200-day, finishing unchanged and overbought ahead of trading on Thursday.
Representative of the selling in recently overbought banks were the sell-offs in stocks like ^WFC^ and ^C^.
Shares of WFC had closed in overbought territory below the 200-day for three days in a row previous to its now two-day sell-off. Shares of Citigroup had closed in overbought territory below the 200-day for five straight sessions before reversing and is also in the second day of selling.
Climbing into overbought territory below the 200-day moving average after a gain of more than 5% were shares of ^URBN^ ahead of trading on Thursday.
Also increasingly overbought below the 200-day, shares of ^GOOG^ closed higher for a seventh straight session on Wednesday.
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David Penn is Editor in Chief of TradingMarkets.com