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Stocks  | December 11, 2019

While value investors look for stocks that have become priced too low or high based on fundamental metrics such as earnings, revenue and debt, technical traders base their buys and sells off of recent trading action in a stock’s charts.

Stocks rarely move in one direction for too long without some degree of retracement, so stocks that have endured heavy buying pressure for an extended period of time are often considered to be “overbought.”

RSI Explained

One of the most popular metrics for determining whether a stock is overbought is relative strength index, or RSI. RSI is an oscillator that fluctuates from 0 to 100 based on the magnitude of recent price changes in a stock. RSI can be calculated on any number of different time periods, but the typical period is 14 days.

The formula for calculating RSI is RSI = 100 - [100/1+(average gain/average loss)]. However, all traders need to know is that the lower the RSI, the more oversold a stock is. The higher the RSI the more overbought a stock is considered to be. Typically, traders use 30 (oversold) and 70 (overbought) as potential buy or sell signals.

Overbought Stocks

The S&P 500 has been on the rise in the past two weeks, gaining 0.4% overall. Here are the nine S&P 500 stock with the highest RSIs as of Dec. 9, according to Finviz:

  1. Humana Inc (NYSE: HUM), 81.5 RSI.
  2. Varian Medical Systems, Inc. (NYSE: VAR), 79.7 RSI.
  3. Amgen, Inc. (NASDAQ: AMGN), 77.1 RSI.
  4. JPMorgan Chase & Co. (NYSE: JPM), 76.5 RSI.
  5. Pentair PLC (NYSE: PNR), 76.3 RSI.
  6. Vertex Pharmaceuticals Incorporated (NASDAQ: VRTX), 76.3 RSI.
  7. ANSYS, Inc. (NASDAQ: ANSS), 75.9 RSI.
  8. Incyte Corporation (NASDAQ: INCY), 75.6 RSI.
  9. International Flavors & Fragrances Inc (NYSE: IFF), 75.4 RSI.

Benzinga’s Take

RSI can be a useful momentum trading tool, but don’t rely on it for long-term investing. A stock’s RSI can drop from overbought territory to oversold territory in a matter of days, and it should only be used as a short-term trading indicator.

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