Shares of United Parcel Service, Inc. (NYSE:UPS) gained about 8% on Tuesday. The move came after the company reported earnings. Investors liked what they heard.
The move may end or pause if UPS reaches levels around $104. It is overbought and may hit resistance there. This is why UPS is our Stock of the Day.
As you can see on the chart, $104 was resistance in June, and it may become so again.
Some people bought shares of UPS at $104 in June, only to regret it when the stock reversed and the price dropped. Some of them decided to hold onto their losing positions, but if the stock got back to their buy price, they would sell.
This would allow them to exit their positions at breakeven. If there is a large number of these sellers, it will create resistance at the same price again.
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UPS is also overbought. Aggressive, emotional buyers have pushed the price above its usual range.
Many trading strategies are based on the concept of reversion to the mean. These overbought conditions will draw sellers into the market. They will be anticipating a move lower, and their selling could put downward pressure on the stock.
There are different ways to determine if a stock is overbought.
One of them is Bollinger Bands. The red line on the chart is one of these bands. It is two standard deviations above the 20-day moving average.
Probability theory suggests that 95% of trading should be within two standard deviations of the mean. If a stock exceeds this threshold to the upside, as UPS has, it is considered overbought.
The Rate of Change (ROC) indicator is at the bottom of the chart. It is another popular way to determine if a stock is overbought. If the blue line reaches an extreme to the upside, like it has now, it indicates overbought conditions.
The combination of being overbought at resistance can be bearish. If UPS reaches $104 again, it may reverse.
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