Stock Of The Day: AbbVie's Rally Looks Stretched — Could A Reversal Be Next?

AbbVie Inc. ABBV is trading higher Tuesday. The stock has been in an uptrend. In the past week, it has gained more than 12%.

But now it is overbought. This could draw sellers into the market and they could pressure AbbVie lower. Benzinga’s team of technical analysts has made it the Stock of the Day.

Overbought refers to the momentum of a stock. Most of the time it will stay in its normal or average trading range. If it is aggressively bought and gets above this range, traders will say that it is overbought.

This could be an important dynamic.

Many trading strategies are based on the concept of reversion to the mean. If something is overbought, this would mean a move lower. Some traders will sell AbbVie in anticipation of this move.

This could put it into a downtrend.

Read Also: How You’ll Know When Tariff Troubles Are Finally Over

The bottom part of the chart has two examples of the Relative Strength Index (RSI). It is a popular indicator that is used to analyze momentum.

The default time period that is used is 14. This measures where the price is now versus where it was 14 days ago. It doesn't account for moves that took place in between these periods.

The 14-day momentum is neutral—today's price is roughly the same as two weeks ago, so it hasn't yet registered the recent rally.

If the time-period setting is changed from 14 to 5, it shows the shares to be very overbought.

Most indicators that traders use come with preset default settings. Sometimes, these can give good signals.

But sometimes, the indicators can be optimized by using different settings. Considering recent market conditions, in the case of AbbVie, a 5-day RSI may be more effective than a 14-day one.

The rally may pause or even end.

Read Next:

• Rare Bullish Signal Just Flashed On Wall Street: Will It Power S&P 500 To 6,000?

Photo: Shutterstock