Overbought/Oversold

Has your broker ever told you that a stock " overbought " or " oversold " ? He probably went on to explain that the shares that you own ( I hope you did not ) had gone so far that it is now sold and gone over ripe for a rally. He could also encourages you to deposit an equal amount to " dollar cost average " to buy your position, so that when ( "if" - he did not say that I have) ) it could rise again " get even" . He could tell that you even " could make a fortune. "
Wait out yet is the big event that is preached by all large mouth street brokerage firm . What is worse, who believe most brokers and financial planners . What happened to all the nice company reports to tell you how wonderful this stock before it was bought . Maybe better read those back to him. Brokerage companies do not want to sell you .
If any stock is either going up or down for any length of time , it seems logical that it is overbought or oversold , but we examine what it means for your property .
The reason a stock started because the underlying profit projection will make substantial profits , which will produce more valuable the stock. At some point , it will reach a true valuation and should stop moving forward. What usually happens is it goes to the true valuation, what is considered overbought ( overvalued ) and then start down . You can encourage to buy if a particular stock " hot ", and everyone buys it . If you buy all the sheep to be a seller or you will be sheared .
Suppose that all of this was in anticipation of future profits that did not materialize ? Then, the increase would have to turn around and head down . This would be more suitable for a smaller company as one of the giants , but giants were overthrown. If fraud was involved in the company even go bankrupt.
Think back flushed to WorldCom that went to the moon and eventually down into the sewers. Has there ever while it had become oversold tank for a rally ? Not hardly because there is no value . Unless you really understand how to trade overbought and oversold situations the best thing to do is to keep your hands in your pockets.
Beauty is in the eye of the beholder . Overbought and oversold in the mind of the buyer / seller .
Copyright 2004 All rights reserved.
Albert W. Thomas 17 years Former member exchange , exchange trader and brokerage company owner . Www.mutualfundmagic.com F * R * E * E investment letter. Author of the bestseller " If it does not go up, do not buy it ! "