The XLKs gapped up after breaking through the $70 – 72 resistance zone and are very overbought. The last four times that they were this overbought – last July, August, October and again in February, a meaningful selloff followed. [b] Look for some consolidation or short-term profit taking.
My definition of ‘overbought’ means that they are trading more than two standard deviations higher than their twenty day moving average. By definition, 95% of all trading should be within two standard deviations of the average. If trading is outside of this range, either to the upside or downside, then there is a significant chance that the short-term trend will revert.
If they do head lower there may be support around the $72 level because it was the top of the recent resistance zone.
Image Source: bullsheatrading.com
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