Too High: 4 Overbought Stocks for Traders

When stocks are moving higher, are you chasing breakouts or looking for overbought stocks to wager against?

Readers of our commentaries on short term trading know that our approach is to buy weakness and sell strength. This means that when markets are moving higher, we are far less inclined to try and buy stocks that have already begun moving. This is the breakout chasing game that a number of short term stock traders play-some of them successfully.

Our approach is different. Rather than try and “catch up” to stocks, we would much rather have stocks come to us. If we are looking to buy a stock, for example, we not only require that stock to be moving lower before we are interested in it, but also we want that stock to continue moving lower after we have targeted the stock for potential purchase.

In other words, in every instance we are looking for stocks to come to us, rather than for us to go to them. This approach helps ensure that when we are buying stocks we are buying them at as low a price as possible. This approach also helps make sure that when we are selling stocks short, we are selling stocks as the highest price possible.

How do we know that the stocks we are looking at are overbought? There are a number of tools that we like. But chief among them are the 16 technical indicators that we have researched and provided to traders as part of our TradingMarkets Stock Indicators. These 16 indicators-8 bullish indicators and 8 bearish indicators–let us know when stocks have moved too far too fast to the upside, becoming overbought, or too fast to the downside, becoming oversold.

The stocks in today’s report came to our attention as a result of screening for stocks that had five or more consecutive higher highs, one of our bearish, overbought technical indicators. We found that stocks that have had five or more consecutive higher highs-and are trading below the 200-day moving average-have actually been lower in one-day, two-day and one-week timeframes. This makes these stocks among the most compelling candidates for short sales.

Click here to read our research into stocks making five or more consecutive higher highs.

Again, context is key. We are not talking about strong stocks, stocks that are trading above their 200-day moving averages. Rather the stocks we are looking to wager against are weak stocks, stocks that are trading below their 200-day moving averages, that are showing suspect strength in the form of multiple consecutive days of higher highs. Our research indicates that these are not rallies to abide by and, instead, are rallies that traders should doubt—