Vishay Intertechnology, Inc. (NYSE:VSH) shares are consolidating on Wednesday. They have gained about 400% in just three months.
But the shares are overextended. This is why Vishay is the Stock of the Day.
• Vishay Intertechnology shares are sliding. Why is VSH stock falling?
Many trading strategies and models are based on the concept of reversion to the mean. If a stock is overextended in one direction or the other, there is a good chance it reverses.
Most of the time a stock stays in its usual or typical trading range. If aggressive and emotional buying pushes the price above this range, traders say that it is overbought.
These conditions will draw sellers into the market. The selling could push the price lower.
The lower part of the chart is the Relative Strength Index (RSI). If the blue line is above the horizontal red line, like it is now, it illustrates overbought conditions.
Traders need to pay attention when market dynamics reach historical extremes. For example, for every week since it went public in 1973, Vishay has been the most overbought it has ever been.
Some traders are watching the shares and are anticipating a reversal or move lower.
The best traders don't try to get the exact top when they are selling. They know it is almost impossible to do.
This is what the old Wall Street expression — “The only people that can get the top and bottom are liars” — refers to.
These traders wait for the downtrend to start before selling their positions. They know they won't get the best price, but also know that waiting for the downtrend to form before selling their shares increases the odds of success.
When a stock's momentum reaches historic extremes, there may be opportunities to profit. Vishay is the most overbought it has ever been. There is a good chance it reverses and heads lower.
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