Hot Money Monday: One potential strategy to beat the market, and how to spot oversold stocks
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One indicator used by chartists to determine an entry or exit point is the “52-week high” signal, which shows how far or close stock prices are to their 52-week highs.
While most chartists believe a 52-week high means there is a strong chance of momentum ahead, it could also indicate the stock has reached its peak.
Academic studies however have shown that there is a “52-week high effect” – ie; stocks with prices close to the 52-week highs tend to have better returns ahead than stocks with prices far from the 52-week highs.
Most technical traders therefore view the 52-week highs as entry signals.
A simple explanation is that if a price has broken out above its 52-week range, there must be some factor that generated enough momentum to further continue the price movement in the same direction.
Similarly, if a stock is far away from its 52-week high, chartists believe the momentum will continue going that way.
Here’s one common strategy which has gained acceptance by the chartists community; it’s called the 52-Week High Rotation Strategy:
This strategy actually goes against the intuitive “buy low and sell high” mantra, but some traders believe it’s good starting point to building an active strategy to beat the market.
|Code||Name||Price||How far from 52-Week High?|
|FRM||Farm Pride Foods||$0.14||0.00%|
|LKO||Lakes Blue Energy||$0.00||0.00%|
|NPM||New Peak Metals||$0.00||0.00%|
|Code||Name||Price||How far from 52-Week High|
|MBX||My Foodie Box||$0.00||94.74%|
Others say the 52-Week High Rotation Strategy is too simplistic, and must be refined with other data to determine whether a stock has been overbought or oversold.
The Relative Strength Index (RSI) is one indicator that’s been used widely to gauge that momentum.
How is the RSI calculated?
U = the percentage of upward-moving days in the last 14 days
D = the percentage of downwar-moving days in the last 14 days
Let’s say you want to calculate the RSI of a stock over the last two weeks (14 days).
If the stock, for example, has risen 10 times in the last 14 days, then:
RSI = 100 – [100 ÷ (1 + (0.71 ÷ 0.29) ) ] = 71.4
Generally speaking, an RSI above 70 is overbought; and an RSI below 30 is oversold. An RSI above 80 is strongly overbought, and an RSI below 20 is strongly oversold.
RSI is in effect a measure of the strength of a stock’s momentum, either in the upward or the downward direction.
Contrary to popular belief, RSI is actually a leading (not lagging) indicator, meaning that it can be used to predict future movements.
In the example above, the stock is overbought and is probably due for a correction.
|Code||Name||2 Day RSI||9 Day RSI|
|PVE||Po Valley Energy||Oversold||Oversold|
|GGE||Grand Gulf Energy||--||Oversold|
|Code||Name||2 Day RSI||9 Day RSI||14 Day RSI||20 Day RSI|
|AAR||Astral Resources NL||Overbought||Overbought||Overbought||--|
|AGC||Aust Gold and Copper||Overbought||Overbought||Overbought||--|
|PLG||Pearl Gull Iron||--||Overbought||Overbought||--|