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

---

Value Investing

By definition, value investing is the process of selecting stocks... Read More

Preholiday Trading

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

Margin Benefits are Marginal at Best

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

When NOT to Invest

Unfortunately, many investors who are seduced by the lure of... Read More

Asset Allocation Lessons: The 70% Inflation Solution

For investors only... and for speculators who need to invest... Read More

Eight Questions to Ask Your Financial Advisor

You may like your financial advisor, but is he really... Read More

Finding the Perfect Company

The perfect company - it's the holy grail of the... Read More

Are You An Investment Dummy Like Me?

I am good at a few things. I can certainly... Read More

Going Against the Conventional Investment Wisdom

First of all, I want to give everyone the disclaimer... Read More

It Must Be Joe Cockers Market

Agonizing displays of poor theatrics failed to entertain my mind... Read More

Your Portfolio and ?Old Ironsides?

The USS Constitution first ventured into the waters in 1798.... Read More

The Difference Between Investing and Trading

Investing and Trading are not the same thing. The returns... Read More

Forex Trading Best Practices

FOREX, the term for the FOReign EXchange market, is an... Read More

Sell Discipline for Investors: Importance and Execution

Investors usually don't have an aversion to buying an asset.... Read More

Secret Stock Options Trading Strategies the Experts Don`t Want You to Know

To understand stock options, we need to look at Webster’s... Read More

The Economys Greatest Depression Downturn Ever Is Now Just A Few Years Away

What really controls the economy? Forget interest rates, forget deficits,... Read More

Chinas Great Missed Opportunity

While a U.S. Representative to the Asian Development Bank Executive... Read More

Investing Online Has Its Rewards: Find Out How To Take Advantage Of Them

Computerized investing. Online investing. Have you taken the next step... Read More

Investing In or Owning Drug Lab Properties

Clean Up (includes the insides and the outside of a... Read More

Landlording 101, Tricks of The Trade

Looking Inside Your Tenant's Mind Basic Mind-Reading Report 101 for... Read More

The Switzerland of Asia Shines

In many respects, Singapore is the Switzerland of Asia.Begun in... Read More

Larry, Moe and Curley, Investment Brokers

Larry, Moe and Curley were sitting in their favorite restaurant... Read More

Investing and Understanding What You Buy

"There is nothing more frightful than ignorance in action!" Johann... Read More

Realistic Investing Expectations

Over the long term stocks have provided us with great... Read More

Why You Need To Buy and Sell Gold Coins (Part 1)

The Value of Gold in a Era of Paper Assets,... 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

Find a Methodology and Minimize Investment Madness

There are many reasons to be investing these days, and... Read More

Discipline in Investing and Trading

Discipline can be simply defined as your ability to follow... Read More

Looking For a Safe Investment? Try a Certificate of Deposit

If you are looking for a safe investment and you... Read More

A Gadfly On A Dinosaurs Butt, Or The Hood-winking Of The American Investor

Have you ever noticed how some words in the English... Read More

Is Starting A Business For Me? What To Consider Before Starting A Business

Do you have the right temperament?Starting a small business is... Read More

Investing and Asset Allocation

Sometimes you spend sleepless nights worrying about which stocks to... Read More

In a Time of Need

As I take my leisurely walk with my dog through... Read More