Has your broker ever told you that a stock is overbought or oversold? He probably went on the explain that the stock you own (I hope you didnt) had gone down so far that it now was oversold and due for a rally. He might also have encouraged you to buy an equal amount to dollar cost average your position so that when (if- he didnt say that, I did)) it did go back up you could get out even. He might even say you could make a fortune.

Waiting to get out even is the great trap that is preached by all the big Maul Street brokerage houses. What is even worse is most brokers and financial planners believe it. What happened to all those beautiful company reports sent to you telling how wonderful this stock was before you bought it. Maybe you better read those back to him. Brokerage companies do not want you to sell.

When any stock is going either up or down for any extended period of time it does seem logical that it can become overbought or oversold, but lets examine what that means to your ownership.

The reason a stock started up is because the underlying profit projection is going to produce substantial profits that will make the stock more valuable. At some point it is going to reach a true valuation and should stop advancing. What usually happens is it goes beyond true valuation to what could be called overbought (over valued) and then starts down. You may be encouraged to buy when a particular stock becomes hot and everyone is buying it. When all the sheep are buying you want to be a seller or you will also be sheared.

Suppose all this was in anticipation of future profits that did not materialize? Then the rise would turn over and head down. This would be more likely for a smaller company than one of the giants, but giants have been toppled. If any fraud was involved the company might even go bankrupt.

Think back to WorldCom that went to the moon and was finally flushed down the sewer. Did it EVER while it was tanking become oversold for a rally? Not hardly because there was no value. Unless you truly understand how to trade overbought and oversold situations the best thing to do is keep your hands in your pockets.

Beauty is in the eye of the beholder. Overbought and oversold is in the mind of the buyer/seller.

Al Thomas

Albert W. Thomas has spent most of his life in the field of finance. In 1965 he founded an insurance holding company, Security Dynamics Investment Corporation, after having been an agent and General Agent for several life insurance companies. In 1970 he became cofounder and president of Real Life Estate, Inc., that marketed a unique real estate and life insurance package.

After he became interested in commodities he bought a seat for his personal trading on the Chicago Open Board of Trade, which is now known as the MidAmerica Commodity Exchange. Later he became a full time trader and also acted as a commodity broker for a few select clients. By fellow floor traders Al is considered to be an excellent technical analyst much of which is outlined in his book IF IT DOESN'T GO UP, DON'T BUY IT! It became a best seller on Amazon.

In 1981 he sold his membership on the Exchange and with his wife, Carolyn, lived full time aboard their 41' ketch, the Aumakua (which means guardian angel in Hawaiian). They sailed in Florida and the Bahamas for two years.

He founded World Trading Group in 1984 that grew to the seventh largest introducing commodity brokerage firm in the U.S. with 35 offices from coast to coast, Alaska and Canada. It was sold in 1992.

Al is a graduate of Northwestern University with a B.S. degree in Commerce and is a member of MENSA. He is now president of Williamsburg Investment Company that syndicates his weekly financial column since 1999 to more than 300 newspapers and writes a financial market letter called Over My Shoulder that is quoted in Barron?s and many other publications. A 3-month trial subscription is available on his web site. He is a regular guest on several financial radio talk shows.

His favorite pastime is fishing.

Mr. Thomas is available for speaking engagements. Please call 321-453-5300 for more information.