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Overbought Tesoro Corp (TSO) Heading Down Soon

Published June 11, 2017
2:03 AM

Tesoro Corporation (TSO) has been in a relatively bullish trend since 2016. On multiple occasions through this trend, three of the technical indicators discussed below are at similar or higher levels, than they are now. These instances have resulted in short-term losses for the stock. I have laid out the reasons and levels to which the stock may drop while it most likely continues its long-term trend.



Tesoro Corporation Chart From TradingView.com

When we look at technical indicators, the relative strength index (RSI) is at 79.4823. RSI tends to determine trends, overbought and oversold levels as well as likelihood of price swings. I personally use anything above 75 as overbought and anything under 25 as oversold. Currently the RSI extremely overbought. The RSI has not been at or above its current level since 2013, which resulted in a 8.96% loss over 7 trading days.

The positive vortex indicator (VI) is at 1.2246 and the negative is at 0.7445. When the positive level is higher than 1 and higher than the negative indicator, the overall price action is moving upward. When the negative level is higher than 1 and higher than the positive indicator, the overall price action is moving downward. The positive value is nearing very high levels. Typically this high results in a downtrend for the stock.

The stochastic oscillator K value is 82.2446 and D value is 72.1417. This is a cyclical oscillator that is highly accurate and can be used to identify overbought/oversold levels as well as pending reversals and short-term activity. I personally use anything above 80 as overbought and below 20 as oversold. When the K value is higher than the D value, the stock is trending up. When the D value is higher that the K value the stock is trending down. The stochastic is almost fully overbought and it has been flirting with this level for a few weeks. An official downtrend should begin once the D crosses above the K value.

SPECIFIC ANALYSIS

I have created an algorithm (called SAG gauge) which signals when stocks are truly overbought and oversold. The algorithm indicates when a particular stock meets multiple criteria which culminates in an oversold or overbought alert. That signal will likely occur over the next few days. The only thing holding this signal from going off now is continued gains in the stock. If the stock moves up for 1-2 more days and then reverses down, the signal should occur. With the stock being extremely overbought and the chance of this indicator going off, now is the best time to enter a position and take greater advantage of the pending movement.

Upon back-testing this indicator, it has signaled overbought status 89 times in the history of the stock. The stock drops at least 0.50% over the following 30 trading days after the indicator date. Eighty percent of the time, the stock drops 3.25% and seventy percent of the time drops 4.75%.

Since the last time the RSI was overbought at its current level, there have been four instances the RSI was overbought, and the positive VI was above its current level at the same time. The additional study requires the stochastic to be overbought as it is today. These instances have resulted in a minimum loss of 3.90% and median loss of 8.10%. All of these statistical losses happened over very short timeframes. Anticipating the stock to continue downward movement for more than 2-3 weeks is not recommended. The maximum movement for this stock could occur within the next 10-15 days.

Considering the RSI, VI and stochastic levels, the overall direction favors a move to the downside. Based on historical movement compared to current levels and the SAG gauge, the stock could drop at least 3.25% over the next 33 trading days if not sooner.

DISCLOSURE: I currently do not have positions in the stock mentioned above. I do not plan to initiate a position within the next 72 hours. Historical movements and technical indicators should never be the sole basis for entering positions involving risk. Make sure appropriate research is conducted prior to taking any risk in a marketplace.

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