Overbought and Oversold Signals

There are several indicators that can be used to determine if stocks are overbought or oversold. The two I like to use are the Commodity Channel Index (CCI) and the Bollinger Bands (BB), both set to a 20 period. I also like to look at the stock being three standard deviations away on the BB and a +- 200 on the CCI.

BIDJust because a stock is overbought or oversold does not mean that it will reverse price action. Rather, the way I see it, an opportunity to potentially either retrace some or all of the move or trend sideways for a bit and then continue in the direction. Either way, there is the potential for a trade to take place.  A lot of what comes next depends on a few things such as what the catalyst was for the move. Was it earnings driven, did an analyst upgrade the stock, was there a short-squeeze, etc. The key is to do your homework and make an informed decision about where you would get in and out of the trade should it meet your criteria.

I always like to look to the left of the chart to see what the stock did the last time it had similar price action. I’ll follow that up by looking at the sector that the stock trades in to see if it is a laggard or a leader. I also like to go with the market direction as it tends to make things just that much easier. ¬†Here are some stocks that gave overbought/oversold signals yesterday:

Overbought

  • $ADBE
  • $BDK
  • $BID
  • $LPNT
  • $NYT
  • $SFY
  • $SOA
  • $SWK
  • $UTHR
  • $WIT

Oversold

  • $GILD
  • $ME

There are probably more names than these, but I like to trade stocks that have a daily average volume of 500K over the last 90 days. I also like stocks above $10 so I filter out those that don’t meet these basic criteria.