Extreme Momemtum Can End in Cataclysmic Cratering
- Posted by Greg Harmon
- on February 6th, 2012
One of the most popular momentum indicators that traders use is the Relative Strength Index (RSI). Stockcharts.com writes (full link below)
I generally use it as a secondary indicator that either reinforces what the price action is saying or gives a potential contrarian signal, but rarely do I use it to develop a trade. But because it is an oscillator the higher it gets the harder it is for it to continue to go higher, to continue the momentum. When it reaches extremes it will correct. This happens either through time or price action, so an extremely high RSI can signal a short opportunity. Here are three that I am following with extreme RSI:
Whirlpool, $WHR, was a premium play for earnings last week that has just kept running higher. Now with a RSI at 83.72 it is very overbought and could use a rest. If it corrects through price it will likely pullback to the 62.50 area at least.
Tata Motors, $TTM
Tata Motors, $TTM, has been moving straight up since the beginning of the year. The RSI at 86.04 is very high, but it also helps reinforce a caution. It has been high for a couple of weeks. It can stay high for long periods of time. If this name starts to correct through price it has first support more than 10% lower. Wait until it shows you it wants to drop and then pounce.
Gilead Sciences, $GILD
Gilead Sciences, $GILD, is the juiciest of them all. It gapped higher after earnings from an already technically overbought situation now has a RSI of almost 94. It can still go higher or sit there but at this level it is much more likely to correct. A price correction on this name has 5% just back to the gap level at 53, and massive potential under that.
These trades may trigger tomorrow, or Wednesday or next week or never. But the potential for reward suggests that they are worth putting alerts on or maybe even stop limit orders.
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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Gregory W. Harmon CMT, CFA, has traded in the Securities markets since 1986. He has held senior positions including Head of Global Trading, Head of Product Development, Head of Strategy and Director of Equity. (More)
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