Marvell Technology, Inc. (NASDAQ:MRVL) shares are trading lower on Friday. They may be staging a reversal, and the move lower may continue, but it is too soon to tell. We have made Marvell the Stock of the Day.

When a stock is extremely overbought, as Marvell is, there is a good chance it will reverse and head lower. But the savvy traders wait for the reversal to actually start before they sell or take a position that will profit from a move lower.

Different techniques can be used to give confidence that the reversal the trader has anticipated is actually beginning.

Many trading strategies are based on the concept of reversion to the mean. If something gets overextended in one direction, there is a good chance it will reverse and go in the other direction.

The red line on the chart is called a Bollinger Band. It is two standard deviations above the 20-day moving average. If a stock is above this, it’s overbought.

A signal that the anticipated reversal may have started would be a close back below this band. This would show that the buying pressure is subsiding. This could signal a reversal.

The lower part of the chart is the Relative Strength Index (RSI). If the blue line is above the top red horizontal line, like it is now, it indicates overbought conditions. If the blue line turns and starts to decline, this could mean the reversal is beginning.

A third technique a trader may use to determine whether a reversal has begun is a move lower back through important short-term support.

Today, the shares open around $283. Many of the people who sold on the open now regret doing so. If the price drops back to this level, they will buy their shares back. This will create support.

A move below this level could also indicate the reversal has begun.

Good traders know they can't get the exact top. Instead, they wait for a reversal to begin before taking a position. They won't get the best price, but the odds of success will be higher.

Image: Shutterstock