January 3, 2013 (Chinavestor) What a start for the year! There are six overbought stock extremes on the following screen. They may continue to advance as long as market sentiment remains strong. But they are vulnerable to correction should the tide turn. This in turn suggests downside risk exceeds upside potential for China Life Insurance (NYSE:LFC), Yanzhou Coal (NYSE:YZC), Aluminum Corp. of China (NYSE:ACH), CNOOC Ltd. (NYSE:CEO), Trina Solar (NYSE:TSL), among others.
Investors have to remember that overbought is not necessarily bearish. It just infers that the stock advanced too much, too fast and is ready for a temporary technical correction.
Trouble is brewing for Monday Medical (NYSE:MR). The stock fell hard on the first trading day of the year with heavy volume. This is a negative sign, may want to short the stock before it goes even lower.
Overbought A technical condition that occurs when prices are considered too high and susceptible to a decline. Overbought conditions can be classified by analyzing the chart pattern or with indicators such as the one above. A sharp advance from $15 to $30 in 2 weeks might lead a technician to believe that a security is overbought. Or, a security is sometimes considered overbought when the stock is trading out of its trading envelope and is approaching the theoretical high. It is important to keep in mind that overbought is not necessarily the same as being bearish. It merely infers that the stock has risen too far too fast and might be due for a pullback.
Oversold A technical condition that occurs when prices are considered too low and ripe for a rally. Oversold conditions can be classified by analyzing the chart pattern or with indicators such as the one above. A sharp decline from $30 to $15 in 2 weeks might lead a technician to believe that a security is oversold. Or, a security is sometimes considered oversold when the stock is trading below its trading envelope and is approaching theoretical lows. It is important to keep in mind that oversold is not necessarily the same as being bullish. It merely infers that the security has fallen too far too fast and may be due for a reaction rally.