Clarifying OBOSS and using STOPS to protect profits.

In the last few weeks I received several questions on how to use OBOSS when it enters over bought territory.  OBOSS sounds like a broken record by alerting investors to protect profits, set stops, and reduce risk over and over again.

When OBOSS hits “over bought” or “extreme over bought” it doesn’t mean sell stocks right away or sell stocks short!  Over bought alerts mean that we should be watching for price weakness that might jeopardize our hard-won profits.  We only want to sell stocks if we have to sell stocks to keep our gains.

OBOSS signaled that we should buy stocks in May.  Now OBOSS is telling us the rally is extending and we should protect the profits generated by our holding stocks long since May.  There are many approaches to protecting stock gains, but my preference is setting stops.   My two personal favorites are setting stops based off of previous support levels and setting stops using Average True Range over 20 days.

As an example, I will use IBM starting in late July when OBOSS started to get several extreme over bought readings.

In the first example I used the last previous support level for the first stop after OBOSS indicated an extreme reading.  When looking for a support, look at the the last time prices declined and held a level before moving higher.  Draw a red support line under that level and be ready to sell if prices test that level again and break lower.  As your stock makes higher highs and higher lows you can move the support level up each time prices hold a new level.  In theory when prices fail to hold a previous support level, something is wrong and the stock should be sold (profits protected).  Right now we are watching IBM’s 197-198 price zone for support.  If IBM breaks that level of support, the stock should be sold and profits protected.

Another strategy is using Average True Range.

I like to use a 30-minute chart with 20 trading days of data (one month).  This is an automated way to mark support and most trading platforms allow you to set up automated stops using Average True Range.  It is a little more sensitive to price action then manually setting stops using higher highs and higher lows so it tends to stop positions out a little early in the trend.  The ease of use makes this method popular, but sometimes prevents full participation in a trend.  You can see how ATR is more sensitive to price as the stop is currently sitting at 198.57 and by most trading platforms you would have been stopped out at 197.50 last Friday due to a gap down open on the ATR stop.

In the event OBOSS pushes above (+2.5)  it is always a good idea to reduce risk by taking some profits at these levels.  The market doesn’t usually continue higher after getting that extremely over bought.

I hope this helps to clarify what we need to do when OBOSS is hovering in the over bought zone.

Be Alert!

Protect Profits!


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