Too Hot Too Handle: 5 Overbought Stocks for Traders
The sideways movement of the markets this week helped reduce a lot of the overbought conditions that had prevented stocks from moving higher. But there were a number of weak, overbought stocks that actually became even more overbought this week. These are the stocks that traders looking to wager against stocks should focus on over the next few days.
All of the stocks in today’s report have 2-period Relative Strength Index values of 98 or more. And some of the stocks have some of the highest, most overbought RSI values I’ve seen in some time. Extremely high overbought RSIs, with readings above 99.50, usually appear in one of two places: runaway bull markets above the 200-day moving average or runaway bear market rallies below the 200-day moving average.
Since all five stocks in today’s report are trading below their 200-day moving averages, you can guess whether or not we think the recent advances in these names are of the bull or bear market variety.
The 2-period RSI is one of the most powerful indicators for short term traders. As a technical analyst, I was also RSI-agnostic, preferring other oscillators like the MACD histogram and the stochastic. But the modifications that Larry Connors and his research team have made to the traditional, 14-period RSI have been so impressive that I, like a lot of technically-oriented traders, have been forced to take a new looks.
What’s there to see? For one, the 2-period RSI has a much shorter “look back” period compared to the 14-day RSI. This means that the 2-period RSI is much more focused on and responsive to short term price movement, as opposed to reading the lingering effects of price moves more than a week old.
The other major change with the RSI was to raise the bar for declaring a stock or market overbought or oversold. The old 14-period RSI, quite frankly, was far too generous in noting stocks as overbought or oversold. The new 2-period RSI requires a stock to rally to 90 (at least) or 98 before that stock is considered overbought. On the other end of the spectrum, the 2-period RSI labels a stock oversold only after it drops to below 10 (at least) and preferably under 2.
One of the most amazing things I noticed yesterday during the Weekly Live Conference Call with Larry Connors was that we were one month away from the date the Dow industrials made its closing low for the year. That date was March 10, and the 2-period RSI on that date was an eye-popping 1.92!
That might not be the craziest oversold reading in the 2-period RSI if we were talking about a stock. But for an index–and the Dow Jones Industrials at that–to register a 2-period RSI of less than 2 is an especially noteworthy development.
That was 30 days and nearly 1,000 points ago. Truly, when a market gets to an extreme based on the 2-period RSI, markets have a tendency to move–and move big.
The stocks into day’s report are overbought rather than oversold, and all have 2-period RSIs of 98 or more. All five stocks also have Short Term PowerRatings of 1 or 2–the lowest possible scores for stocks in our rating system. Our research into short term stock price behavior since 1995 pointed out that stocks with Short Term PowerRatings of 2 trailed the average stock after five days. But stocks with the lowest rating of 1 actually fared worse, underperforming the average stock by a margin of nearly 5 to 1 after five days.
Borders Group
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BGP |
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PowerRating). Short Term PowerRating 1. RSI(2): 98.85
Linn Energy LLC
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LINE |
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PowerRating). Short Term PowerRating 2. RSI(2): 63.11
Scientific Games
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SGMS |
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PowerRating). Short Term PowerRating 2. RSI(2): 99.93
Smith Micro Software
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SMSI |
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PowerRating). Short Term PowerRating 1. RSI(2): 99.89
Synaptics
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SYNA |
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PowerRating). Short Term PowerRating 2. RSI(2): 99.74
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David Penn is Senior Editor at TradingMarkets.com.