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CAT, XOM show trading extremes

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bear_bull August 15, 2013 (Chinavestor) Overbought components of the Dow ceased to exist now that the index dropped triple digits on Wednesday, for the first time since June. Most Dow components have traded in a narrow range lately, except for Caterpillar Inc. (NYSE:CAT). Even CAT is not overbought despite showing progress in the last five days. The stock is looking good from a technical point of view now that it leveled off on Wednesday.

 

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While there is not much to find on the overbought screen save for CAT, the oversold screen offers a lot more for short term investors. Intel Corp. (NASDAQ:INTC) is on top of the oversold chart but is not considered extremely oversold. Same goes for IBM (NYSE:IBM) and Home Depot (NYSE:HD). All these stocks are still far from theoretical lows, a point where upside potential exceeds downside risk.

But investors better take a second look at Exxon Mobile (NYSE:XOM). The stock fell too hard, too much not just in the last few days but since July 22, as a matter of fact. The decline looks excessive on the oversold screen offering intelligent investors a trading opportunity.

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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.

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