When a stock or ETF becomes overbought, it can maintain that condition for an extended period.
In the one-year daily chart of Consumer Discretionary Select Sector SPDR (XLY) below, I've highlighted two similar instances from the past.
RSI (Relative Strength Index): As a stock rises, the relative strength index (RSI) measures the strength of the trend.
Once in overbought territory, it's advisable to wait until the RSI falls back below 70 before considering a contrarian trade.
The trade To benefit from a pullback in XLY, the trade structure I am going to use is called a "bear put spread".
Persons:
Nishant Pant
Organizations:
Federal Reserve, CNBC, NBC UNIVERSAL
Locations:
overbought