Stock Of The Day: Time To Sell Ross Stores?

Ross Stores, Inc. (NASDAQ:ROST) is quiet on Monday. On Friday, the shares gained almost 8.5%. The move came after the company beat earnings expectations and raised guidance.

The shares may see some profit-taking, which could put downward pressure on them. This is why Ross Stores is our Stock of the Day.

Some traders study a stock's momentum. This is a measurement of how far it has moved in a given period of time.

Stocks typically spend most of their time within an average trading range. If a stock is aggressively bought or sold, it can be pushed outside this range. When this happens, traders pay attention.

They know there is a good chance the stock will eventually return to the average range.

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If a stock is above this range, traders call it ‘overbought'. Some may enter the market as sellers because they will be anticipating a reversal or move lower.

Many traders use the Relative Strength Index Indicator (RSI) to determine whether a stock is overbought. This indicator is on the lower part of the chart (see below).

If the blue line is above the horizontal red line, it indicates overbought conditions. As you can see, that is the case now.

You can also see that Ross Stores has been overbought four times in the past year. Three of these times, the stock reversed and headed lower.

The one time it didn't reverse was in August. The shares didn't go lower, but they did head sideways.

Many trading styles and strategies are based on the concept of reversion to the mean. If something goes too far one way, there is a good chance that it reverses and heads back the other way.

Ross Stores is now extremely overbought. There is a good chance that profit takers will enter the market as sellers, and this could put downward pressure on the shares. Ross may be about to head lower again.

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