Stock Of The Day: Oracle's Hot Streak Could Be Cooling Off

Shares of Oracle Corporation ORCL are gave back some of their recent gains on Monday. The shares rallied almost 20% in just three days, fueled by a strong earnings report and upbeat guidance.

But now the shares are extremely overbought. We have made it our Stock of the Day because stocks that are overbought tend to reverse and sell off.

Most of the time, a stock stays within its average or typical trading range.

If there is aggressive and emotional trading, traders may push it below this range. When this happens, a stock is considered to be oversold.

If aggressive and emotional buying occurs, the stock may be forced above the range. If this occurs, the stock is considered to be overbought.

There are dozens of ways to measure a stock's momentum to see if it is overbought. Five popular indicators are on the Oracle chart.

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The red line on the chart is a Bollinger Band. It is two standard deviations above the 20-day moving average. If the stock is above this, it is considered overbought, like now.

The first indicator on the lower part of the chart is called the Relative Strength Index. If the blue line exceeds the red horizontal line, it indicates overbought conditions.

The second indicator on the lower part is called Rate of Change (ROC). It measures the percent change of recent moves. If it gets high, it indicates overbought conditions.

The last two are Stochastics and Moving Average Convergence Divergence (MACD). These use different moving averages to measure momentum. When the averages get close to the upper threshold, the stock is overbought.

Many newer traders use numerous indicators to attempt to gain insights. They think that the more they use, the better their results will be.

But sometimes this is wrong. It can lead to confusion.

It is important to understand that these indicators are all different ways of measuring the same thing. Some traders would be better off if they just picked two or three of these indicators and became comfortable with them.

Successful traders know that trading doesn't need to be complicated. There are many ways to see that Oracle is overbought and it doesn't matter which one is used. The important thing is that the shares may be about to head lower.

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Photo: Rokas Tenys via Shutterstock