How to identify an overbought stock
A security is overbought when it is subject to a persistent upward pressure due to extreme fund inflows. When a security is overbought it is often due for a correction.
There are two types of overbought indicators, fundamental overbought securities, and technically overbought securities.
The most common fundamental overbought indicator of a stock is the price-earnings ratio. A company’s P/E must be compared to its sector or relevant index, to conclude whether a company is overbought or not. However, to gain an understanding of fundamental analysis of stocks click here.
MacroVar overbought indicator
MacroVar monitors all major financial markets for overbought conditions. Values of the MacroVar momentum oscillator higher than +2.5 signify overbought conditions.
It must be noted that the MacroVar oscillator must be compared to the rest of the security’s quantitative factors and other factors affecting the specific security.
The MacroVar momentum oscillator is the z-score of the current security price versus the 1-year security price. The formula for the MacroVar oscillator is:
MacroVar Oscillator = (Current Price – 250 trading days price simple moving average) / (250 days price standard deviation)
Traders should pay less attention to overbought or oversold conditions during strong trends. They should pay close attention during counter trends and all combined with the RSI.
MacroVar also tracks the RSI which is a common momentum oscillator.