Western Digital Corp. (NASDAQ:WDC) is trading higher on Monday. The shares have gained about 30% in one week.
But they may be on the verge of a reversal and are extremely overbought. This is why Western Digital is the Stock of the Day.
• Western Digital stock is under selling pressure.
“The only people who can get the top or the bottom are liars” is an old expression on Wall Street. It refers to how it is virtually impossible to buy shares at the exact bottom or sell at the exact top.
If they want to sell, they stay in the position until the trend begins to reverse. Then they act.
If a stock gets pushed above its typical or normal trading range, traders say it is “overbought.” This is important.
Many trading strategies are based on the concept of reversion to the mean. If a stock is overbought, traders and investors will enter the market as sellers.
They will be expecting a reversion or move lower. Their selling could put downward pressure on the shares.
The lower part of the chart is the Relative Strength Index (RSI). It is a popular way to measure a stock’s momentum.
If the blue line is above the red horizontal line, it indicates overbought conditions. As you can see, that’s the case now.
A potential exit strategy would be to sell when the blue line turns lower. This would show that the rally is losing steam. The buying pressure is dissipating.
The red line on the chart is two standard deviations above the 20-day moving average. If a stock is above this line, like it is now, it is considered to be overbought.
If Western Digital shares trade back below this line, it may indicate that the rally is coming to an end. Some would use this as a signal to sell.
Successful traders understand that they will never be perfect. Traders know they can’t sell at the exact top, so they wait for the reversal to start. Then sell.
Traders also know the odds of success will be higher if they wait for a reversal to begin before exiting the position.
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