4 Overbought Stocks for Traders

In markets headed higher or lower, one of the great things about trading stocks is that there is always an opportunity around the corner. These opportunities can be especially stark when the broader market is exhibiting the same kind of strength in weakness or weakness in strength characteristics that we at TradingMarkets look to find in individual stocks.

For example, on a short-term trading basis, the fact that the S&P 500, Dow and Nasdaq are still trading below their 200-day moving averages means that—again, on a short-term trading basis—any advances should be suspect. While longer-term investors may want to consider buying markets that are trading below the 200-day moving average (indeed, both the exchange-traded funds for the Dow Industrials and S&P 500 have high, long-term or investors PowerRatings), traders operating in a short-term time frame need to have the wind at their backs before they can feel confident in having an edge. And for short-term traders, that wind at their backs is created by only buying stocks that are above their 200-day moving averages and only selling short stocks that are below it.

(This, by the way, is part of what we teach in our TradingMarkets Path to Professional Trading course. Click here to register and join us. Registration and the course are both free.)

With the markets in general below the 200-day moving average, traders should spend relatively more time looking for stocks to short rather than stocks to buy. And when it comes to shorting stocks, the TradingMarket approach is simple and straightforward: look for weak stocks (i.e., stocks trading below their 200-day moving average) that are displaying temporary or abnormal strength.

One of the best ways to detect this sort of temporary or abnormal strength is through the Relative Strength Index or RSI. The RSI is a classic technical analysis indicator introduced decades ago that traders have been using consistently to gauge when markets have a surplus of sellers (an oversold market) or a surplus of buyers (an overbought market).

TradingMarket's enhancement of the RSI has been to shorten the time period. While the traditional RSI uses 14-periods, our research has found that a much shorter, 2-period RSI works much better for short-term trading.

(Click here to read our research into how to trade using the 2-period RSI.)

Additionally, by raising the bar of "overbought" to 98 (RSI values run from 0 to 100), our approach focuses only on those extremely overbought stocks which, when already trading from a position of weakness below the 200-day moving average, are often some of the best candidates for traders looking to sell strength.

The list below includes four stocks, three with PowerRatings of 2 and one with a PowerRating of 1. Each of these stocks is trading below its 200-day moving average, and is dramatically oversold with a Relative Strength Index value of 98 or more. I have also noted the 100-day historical volatility (HV) of each stock to help traders select the stocks most likely to respond to their overbought condition with a stronger price move.

Altus Pharmaceuticals (ALTU | Quote | Chart | News | PowerRating). PowerRating 1. RSI(2): 98.34. HV(100): 109.17

Buckle, Inc. (BKE | Quote | Chart | News | PowerRating). PowerRating 2. RSI(2): 99.43. HV(100): 49.01

Quantum Corporation (QTM | Quote | Chart | News | PowerRating). PowerRating 2. RSI(2): 98.30. HV(100): 58.40

TravelCenters of America (TA | Quote | Chart | News | PowerRating). PowerRating 2. RSI(2): 98.64. HV(100): 77.62

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