Overbought/Oversold

Has your broker ever told you that a stock is "overbought" or "oversold"? He probably went on the explain that the stock you own (I hope you didn't) had gone down so far that it now was oversold and due for a rally. He might also have encouraged you to buy an equal amount to "dollar cost average" your position so that when ("if"- he didn't say that, I did)) it did go back up you could "get out even". He might even say you "could make a fortune".

Waiting to get out even is the great trap that is preached by all the big Maul Street brokerage houses. What is even worse is most brokers and financial planners believe it. What happened to all those beautiful company reports sent to you telling how wonderful this stock was before you bought it. Maybe you better read those back to him. Brokerage companies do not want you to sell.

When any stock is going either up or down for any extended period of time it does seem logical that it can become overbought or oversold, but let's examine what that means to your ownership.

The reason a stock started up is because the underlying profit projection is going to produce substantial profits that will make the stock more valuable. At some point it is going to reach a true valuation and should stop advancing. What usually happens is it goes beyond true valuation to what could be called overbought (over valued) and then starts down. You may be encouraged to buy when a particular stock becomes "hot" and everyone is buying it. When all the sheep are buying you want to be a seller or you will also be sheared.

Suppose all this was in anticipation of future profits that did not materialize? Then the rise would turn over and head down. This would be more likely for a smaller company than one of the giants, but giants have been toppled. If any fraud was involved the company might even go bankrupt.

Think back to WorldCom that went to the moon and was finally flushed down the sewer. Did it EVER while it was tanking become oversold for a rally? Not hardly because there was no value. Unless you truly understand how to trade overbought and oversold situations the best thing to do is keep your hands in your pockets.

Beauty is in the eye of the beholder. Overbought and oversold is in the mind of the buyer/seller.

About The Author

Copyright 2004 All rights reserved.

Albert W. Thomas Former 17 year exchange member, floor trader and brokerage company owner. F*R*E*E investment letter www.mutualfundmagic.com. Author of best seller "IF IT DOESN'T GO UP, DON'T BUY IT!"

al@mutualfundmagic.com

---

Retire Dollar Smart

Jim Miller is a registered investment advisor. This means that... Read More

Margin Benefits are Marginal at Best

Margin is one of those things that novices find puzzling... Read More

Keeping It Interesting

Some lines from a movie never leave your mind; I... Read More

Effective Advice For A New Generation of Investors

CATCHING A FALLING KNIFEOne of the most common mistakes made... Read More

Evaluating A Money Manager

Scams and frauds are designed to take your money through... Read More

The Conflict of Interest Game

Disgruntled investors are going after Wall Street once again, this... Read More

Trend Following

Trend following also called momentum trading is the simplest and... Read More

Asset Allocation: Critical to Your Investment Success

Asset allocation is a critical component of investing success. Both... Read More

Exchange Traded Funds

They call 'em ETFs.There are hundreds of them.The mutual funds... Read More

Top Ten Investment Mistakes

1. Lacking an investment plan a/k/a/ "Don't take a trip... Read More

Use of a Franchise Business as a Family Tax Planning Strategy

Suggesting the use of a franchise business as a vehicle... Read More

Day Trading the SP Futures with Initial S/R and the NYSE TICK

For instance, if the market moves up in the first... Read More

Do You Need A Financial Planner?

No matter how much money you make, it pays to... Read More

Part II of Day Traders and Swing Traders and Options? Maybe!

Before every protective put trade it is possible to calculate... Read More

Preholiday Trading

The Light Crude Continuous Contract closed at $66.13 a barrel... Read More

June 2005: Weather Forecasts for Weather Traders

If Johannes Kepler, the renowned 17th century astronomer and discoverer... Read More

Investing In Sons Business Could Cause A Real Family Feud

Q: My youngest son wants to borrow $5,000 to start... Read More

Diversify!

The best way to avoid being hit hard by a... Read More

Remembering TEOTWAWKI and Learning from It

Its only been about 5 years since we had major... Read More

Franchise Investing, Franchise Opportunities and Franchising Renewals

Have you considered buying a franchise instead of trying to... Read More

Online Trading Options Strategies - Rolling

Rolling is defined in options online trading as moving a... Read More

Issuing Warrants to Investors

When raising capital for a business venture, warrants are a... Read More

The Differences Betweeen the Wealthy and Everyone Else

I recently received an e-mail from a young lady who... Read More

Well Managed Investing Risks Bring Rewards!

"Risk comes from not knowing what you're doing!" Warren Buffett... Read More

Approaches to Investing

Here is a small summary of the three major approaches... Read More

Buying a Home - Your BIGGEST Investment

This column has often focused on intangible investments like stocks... Read More

Seven Investment Terms Everyone Should Know

For those who have never given their financial future a... Read More

CYA

You all know what CYA stands for. Of course, Cover... Read More

When Its Too Late to Save for Retirement

You are 55 years old (or somewhere around there) and... Read More

Options Education : Opinion versus Fact!

The most basic aspect of trading is learning to differentiate... Read More

Copy Cat or How to Use a Successful Trading System

How many books have you read about successful traders? How... Read More

Just what is Arbitrage Investment?

In the simplest of terms, Arbitrage means to exploit price... Read More

Getting Started Investing is Often the Hardest Part

There are several reasons people give for not investing their... Read More