We worried about the rally in Red Hat Inc. (RHT) at the end of September, and I recommended this strategy, "There are more technical reasons to be cautious on RHT than back in July. While I do not see a bearish top pattern, I would be more comfortable with just a small position -- maybe some at-the-money calls if I am wrong." So, with RHT rallying to a new high above $120, I have to admit that the trend has been more powerful and durable than the indicators suggested. (Jim Cramer also writes about Red Hat and other hot companies in his opener this morning.)
I tell my college students and regular readers of my "Korner" that no investment approach is 100% perfect. So it has been a couple weeks since we recommend selling down to a sleeping position; has anything changed with the charts and indicators? Let's check them out.
In this daily bar chart of RHT, above, we can see how prices tested the rising 50-day moving average line in March, May, June and August. There was just a shallow dip in late September that stopped short of a test of the 50-day line, showing to me that buyers of RHT were more aggressive in buying a partial pullback. Prices are above the rising 200-day average line, maybe too far above the line. The On-Balance-Volume (OBV) line recently made a new high for the move up, confirming the advance. The slow stochastic indicator (one of many measures of whether a market is overbought or oversold) is pinned to the top of the chart and tells traders who use this tool that prices have gone up too far and too fast. A sideways or lower correction is the way this kind or overbought condition is unwound.
Bottom line strategy: RHT has nearly doubled from its late 2016 nadir. Can prices continue to levitate higher? Sure. I underestimated the strength before. Maybe I have a fear of heights? Again, we do not have a distribution pattern, so traders will need to be alert for a possible key reversal or a two-day reversal if these overbought readings actually translate into a correction.
