BALTIMORE ( Stockpickr) -- When you're looking for trades to make in this volatile market, think "extreme."Stocks trading at price extremes -- either overbought or oversold -- can offer investors outsized risk/reward tradeoffs. They can also create trading opportunities in markets that aren't offering much direction right now. But to find trades in overbought or oversold stocks, it's crucial to know what you're looking at. For starters, when we talk about overbought or oversold, we're not talking about a company being over or undervalued. Instead, we're talking about price extremes in a stock's momentum. Overbought doesn't mean that a stock costs "too much" -- only that it has accelerated more quickly than the market typically allows. >>5 Beaten-Down Stocks That Could Rebound in 2012 We're using the 14-day relative strength index (RSI) as a way to measure whether a stock is at price extremes; generally, when RSI climbs above 70, a stock is considered overbought -- and it's considered oversold on a slide below 30. One of the most common myths about momentum is that overbought or oversold conditions mean that it's time to bet on a reversal. In fact, a number of studies have shown that stocks that become overbought are statistically more likely to continue higher in the short-term than they are to reverse. That's why looking at technical price action is crucial to trading these names at extremes.
2012 Stock Predictions and Outlook
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