Overbought Stock of the Day: General Motors (GM)
General Motors (GM) has seen its shares surge over 29 percent since the start of the month. That’s a huge move for a large-cap automaker, and naturally shares look overbought as a result.
That’s clear to see on the chart, where the company’s relative strength index, or RSI, has topped 77. That’s higher than the 70 level where most traders consider a stock overbought.
Further, the divergence from the company’s 50-day moving average has increased substantially. The more that divergence increases, the more likely a severe pullback like a stretched rubber band will occur.
- 250 Stocks to Sell Now
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This stretched valuation has now brought shares to breakeven over the course of the past year, unwinding the March meltdown in the stock. However, in the short-term, a pullback from here is looking increasingly likely. Friday’s decline may be the start of the stock coming off its overbought level.
Action to take: The January 2021 $35 put looks like a great trade here. The option last traded for around $2.25. But if shares head back to $30, about where they started their recent outperformance, the option could be good for a clean double. At the very least, a pullback should give these options buyers a high double-digit gain before the end of the year.