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Overbought in an Uptrend: WCOM by kensey |
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Worldcom Inc (WCOM)     |
On the stochastic (bottom) indicator graph, WorldCom went into overbought territory in January and stayed for over a month. Is this a big deal? Not exactly. When WCOM went MACD bullish (green) in mid-January, it was already overbought as far as stochastic was concerned. But this was a case where the MACD trend was more important than the short-term stochastic reading - MACD was above the centerline (the third graph down), so overbought wasn't much cause for alarm. The overbought reading on stochastic that occurred in early December was more a cause for concern because MACD was way below the centerline at the same time. In other words, this stock was acting strong short-term but was in a longer-term pullback. This typifies your "overbought in a downtrend" scenario. That wasn't what was going on in January and February when the stock was rebounding. |
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It is important to identify the change of trend. Stochastic gives the wrong signal when stocks shift from a downtrend to an uptrend. (It's always going to be overbought in such a case.) Is it crystal clear that WCOM switched from
a downtrend to an uptrend in mid-January? Yes. The thing to note is
that the MACD lines crossed over the centerline
in a pretty smooth and graceful manner. There
was no dramatic plunge beneath the centerline
that occurred during the January 1 slide.
The basing action was therefore healthy and the
stock, when it turned above center, vamped
up in a healthy way.
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