what does overextended mean?

[njshiva]

I sometimes hear chart overextened ..what exactly does this mean.? If some one can give me an example chart with explanation I would greatly appreciate it.

Regards
njshiva

[Leaira]

Overextended is similar to overbought in that the stock is likely to pull back in short-term, but the difference is in which indicators are used to determine it.  Overbought conditions are indicated by a high reading on stochastics or RSI (relative strength index), but overextended refers to a stock that is trading way above the upper bollinger band, so it's likely to snap back down to it.

For example, a stock that's overextended right now would be BDCO (Blue Dolphin Energy Co.), closing at $7.09 with the upper bollinger band at only $5.50.  For such stocks, I usually wait till they come back down to the bollinger band, if not the 5-day EMA before buying.

Leaira

[njshiva]

Overextended is similar to overbought in that the stock is likely to pull back in short-term, but the difference is in which indicators are used to determine it.  Overbought conditions are indicated by a high reading on stochastics or RSI (relative strength index), but overextended refers to a stock that is trading way above the upper bollinger band, so it's likely to snap back down to it.

For example, a stock that's overextended right now would be BDCO (Blue Dolphin Energy Co.), closing at $7.09 with the upper bollinger band at only $5.50.  For such stocks, I usually wait till they come back down to the bollinger band, if not the 5-day EMA before buying.

Leaira

Thanks Leaira!!. looks like bdco was indeed overextened yesterday closing above 7 bucks. Came down 1$ today.
BTW, applaud you nxxi pic. Congrats!!  I got in at 2.05 . I feel it still has some more upward potential

njshiva

[Leaira]

One other point I forgot to mention about overbought and overextended situations is that the distinction is especially important for trend traders.  I'm been a trend-trader for almost the entire time I've been in the stock market, and I've noticed that many stocks will show up as "overbought" cuz that's the nature of the RSI and stochastic indicators.  This makes them nearly useless for trend trading (like ADX/DMI is useless for channeling stocks).  But I will never buy a stock at "overextended" levels.

So I guess the term "overbought" would be most useful for channeling stocks, and "overextended" for trending stocks.

Leaira