TradingMarkets Danger Zone: 3 Overbought Stocks for Swing Traders

Stocks were largely flat after yesterday's "kick save", with buyers stepping in to boost the markets off their lows.

The uptrend - now a month in duration - remains intact in the S&P 500, Dow industrials and the Nasdaq Composite. So far, leadership has come from both beaten-down financials and technology shares - which enjoy bullish seasonality in the second half of the year through December. When markets are on retreat, the most bullish stocks have been energies - the vast majority of which are in pull back mode.

ADC Telecommunications Inc. (ADCT | Quote | Chart | News | PowerRating) Short Term PowerRating 1. RSI(2): 98.87

While the bullishness of the past 30 days is nothing to fade, the fact of the matter is that stocks remain under a great deal of pressure. Although the Nasdaq has managed to close above its 200-day moving average on Monday, even this outperforming index shows signs of being increasingly overbought as it attempts to hold ground north of that key long term moving average.

Arthrocare Corporation (ARTC | Quote | Chart | News | PowerRating) Short Term PowerRating 1. RSI(2): 99.00

Because of this, while stocks do continue to move higher, we think it is a good idea for traders to keep a watch list of stocks that may be especially vulnerable to reversal to the downside. All three stocks in today's report are trading below the 200-day moving average, which puts them in the category of the kind of weak stocks that we believe swing traders should limit themselves to when looking to sell stocks short.

Tessera Technologies (TSRA | Quote | Chart | News | PowerRating) Short Term PowerRating 1. RSI(2): 84.07

Additionally, today's stocks have exceptionally high 2-period RSI values - particularly ADC Telecommunications Inc. and Arthrocare Corporation, both of which have 2-period RSIs of more than 98. We have found that stocks with 2-period RSIs of more than 98 have produced negative returns in one-day and one-week timeframes.

Click here to read more on our research into stocks that are trading below their 200-day moving averages and have 2-period RSIs of more than 98.

All three stocks in today's report have Short Term PowerRatings of 1. Our research into short term stock price behavior indicates that stocks with Short Term PowerRatings of 1 have underperformed the average stock by a margin of nearly 5 to 1.

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David Penn is Senior Editor at TradingMarkets.com.