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Stocks  | July 16, 2020

There’s a saying on Wall Street that the trend is your friend. But when it comes to today’s bullish trading environment and its handful of leading companies, there’s another saying to keep in mind. All stock cycles come to a certain end. Having shared that, here are three overbought stocks to sell.

Timing a top in stocks is tricky. The dynamics at play can be every bit as difficult as calling a bottom. And don’t forget, Wall Street just witnessed a massive bottom in the market.

Even legendary value investor Warren Buffett — who’s celebrated for buying when others are selling — failed to see the opportunity at hand. In wake of the bear market, he made no big moves. The only word from the investment manager was the firm dumped its entire airline stake during the selloff. Buffett also famously warned investors “the world has changed.”

But that was then, and this is now. At the moment, the world is still wrestling with the novel coronavirus. But current challenges are in stark contrast to a market led by the tech-heavy Nasdaq Composite. The index has delivered returns of around 18% on the year, set new record-breaking highs and gained a stunning 60% from its late-March bottom.

OK, here’s one more infamous saying. Don’t fight the Fed. And yes, the unprecedented monetary action taken by regulators has been critical to 2020’s historic rally. But any investor looking to hop on board the Federal Reserve’s gravy train is dreadfully late to the depot. That looks particularly true in these three overbought stocks to sell:

  • Tesla (NASDAQ:TSLA)
  • Zoom Video Communications (NASDAQ:ZM)
  • Apple (NASDAQ:AAPL)

Stocks to Sell: Tesla (TSLA)

Telsa (TSLA) weekly chart illustrating of a bearish top

The first of our overbought stocks to sell is Tesla. It seems like only a week ago I was bullishly making the case for momentum to continue in TSLA. In fact, it was just a handful of sessions ago. But that was then and this is now.

With my bullish outlook, I recommended the 31 July $1,500/$1,550 call spread. Since then, TSLA stock has hit a peak just shy of $1,800.

But importantly, Tesla’s indicator lights now point at a vehicle that’s run out of fuel. The parabolic move saw shares plow briefly through technical Fibonacci-based barriers, and almost comically put January’s and February’s rally even further in the rear-view mirror.

TSLA is an overbought stock to sell today.

Zoom Video Communications (ZM)

Zoom Video (ZM) weekly price chart showing extreme action

The next of our overbought stocks to sell is Zoom Video. Zoom’s video conferencing platform has been a huge beneficiary of stay-at-home policies and in general, social distancing practices. I’m certain I’m not telling readers anything new. People love Zoom!

Story aside, even the best growth stocks will correct in price. And those bearish periods can lead to declines of around 30%. What’s more, they can happen in even the healthiest of stock markets. Sound familiar? Well, it looks very familiar on the weekly price chart of this overbought stock to sell.

Technically, the price action in Zoom hasn’t been as extreme as in Tesla. But shares are extended. That’s evidenced by an overbought stochastics indicator that’s bearishly crossed over. Plus, ZM’s most recent base is now roughly 55% beneath this week’s all-time highs.

With shares forming a bearish engulfing candlestick top, Zoom Video is a stock to sell until a well-supported corrective move enters the picture.

Apple (AAPL)

Apple (AAPL) monthly stock chart showing extreme price action

The last of today’s stocks to sell is Apple. The tech behemoth has managed to pull the rabbit out of the hat and climb to new all-time highs. This has given Apple shareholders bragging rights once more. The price action has also been extreme enough to warrant caution.

Technically, Apple’s rally has launched shares through its upper monthly Bollinger Band. Prior instances have marked notable tops — most recently in February and in late 2018. Today’s warning also finds the stock testing Fibonacci-based, two-step or mirror-move extension levels. Moreover, the challenge of this resistance zone has occurred on the back of a very steep and unsustainable uptrend from AAPL’s March low.

In fairness, Apple isn’t a stock to short just yet. Stochastics is still out of position. Also, calling an end to what’s been a very friendly trend without a candlestick indication of a top isn’t a great strategy to remain open for business as a trader. Still, Apple is a stock to sell into today’s strength while others are still being greedy.

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