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5 Overbought Stocks For Traders To Watch

Posted: Jun 19, 2009 15:39 PM by Casey Murphy

Filed Under: Forex,Technical Analysis

Tickers in this Article: BT, CVD, ICLR, SO, VIVO

One of the most popular tools in technical analysis that is used to predict a shift in a stock's momentum is known as the relative strength index (RSI). This indicator's primary purpose is to determine when a given rally is becoming overbought or oversold. Generally speaking, readings below 30 suggest that the stock has been pushed to an unjustifiably low level, causing most bullish traders to start looking for a strategic entry position. On the other hand, readings above 70 are often used to suggest that the rally is getting exhausted and that the bears may be getting ready to send the stock lower. In most cases, traders will want to confirm any buy or sell signal by using other technical indicators to increase the probability that a predicted move will actually occur. Let's take a look at a few stocks that have recently entered overbought territory because these could be candidates for a short-term pullback when the broad market rally ends.

Meridian Bioscience Inc. (Nasdaq:VIVO)
Taking a look at the daily chart of VIVO, you'll notice that the bears have been in control of the direction for the last several months. The bulls have managed to stage a couple different rallies, but each move higher was prevented from continuing when the stock tried to break above the resistance of its 200-day moving average (shown by the black arrows). Since the nearby moving average has prevented a reversal in the primary downtrend in the past, and because the stock is currently showing overbought readings on the RSI, it seems that the short-term upside is limited from here.

Southern Company (NYSE:SO)
SO is another company that has triggered an overbought condition when using the RSI. As you can see from the chart below, the stock has been moving sideways for the past couple of months and the recent move toward the resistance level (dotted line) suggests that this stock could be positioned for a pullback. The overbought reading on the RSI suggests that upside could be limited from here, so bullish traders may want to remain on the sidelines until the price moves above $32.

Covance Inc. (NYSE:CVD)
Looking at the daily chart of CVD, you can see that it has been on an impressive run since the beginning of March, which has sent the RSI above 70. The overbought reading on the RSI will likely be used by bullish traders to suggest that the trend is weakening and that it may be time to take profit off the table. The price of the company's shares is nearing its 200-day moving average (pink line), which will likely add to the selling pressure. It wouldn't be surprising to see bearish traders set their stop-loss prices above the long-term resistance of the 200-day moving average (pink line). Longer-term bulls will want to see the price close above the 200 DMA before betting on a trend reversal. Other companies that have charts similar to CVD include ICON plc (Nasdaq:ICLR) and BT Group plc (NYSE:BT). (For more on using this technical indicator, see Ride The RSI Rollercoaster and Exploring Oscillators and Indicators: RSI.)

Bottom Line
What do you think will happen to the stocks mentioned above? Will the 200-day moving averages keep these stocks in a long-term downtrend? Trade these stocks in your FREE Investopedia Simulator Account.

By Casey Murphy

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Casey Murphy is the senior analyst at Investopedia.com and is a graduate of the University of Alberta School of Business. He specializes in stock analysis and is dedicated to uncovering profitable investment opportunities. Click here to follow Casey on Twitter.

Filed Under: Forex,Technical Analysis

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