Sunday, January 31, 2010

How oversold are the markets here?

Another trading week begins tomorrow and whether we go up or down, one thing is for sure....its not going to be easy out there. So, I thought it would be helpful to step back and have a look at where we are currently in the bigger scheme of things. 

The McClellan Oscillator is basically based on the advance/decline statistics of the market. Since we look at the indicator from a relative point of view, for the purpose of this post it is not necessary for me to go into the specifics of how the indicator works. But for those of you who are serious about using this indicator, I would encourage you to get a feel of how it actually works. As we will see in the charts below, the indicator works rather well in identifying overbought and oversold conditions. I would rather go by it than use stochastics or RSI which can stay in extreme conditions "forever".

Let's start with the NYSE McClellan Indicator. I opted for a two year chart as I wanted to compare the pullback here with the severe drawdowns of the last two years. It seem like the indicator has gone lower only 5 times in the last two years. Only three times before in the past three years - October 2008 and March and November of last year - has the indicator gone below -100. We are currently at -93.47.

Now, on to the Nasdaq McClellan Indicator. It seems to be a point from where the market has bounced at least 5 times in the last two years.

Conclusion: It wouldnt be surprising to see the markets bounce from here. But at the same time, we certainly have gone a lot lower in the past, though I do not see a March or an October coming. No way are things even half as bad as they were then. I still do believe that any bounces should be taken as an opportunity to get out of or lighten up the long positions and initiate short positions.

What do you readers think? Drop in some comments or answer the poll on the top!

BTW, I am sorry but its looking more and more likely that I wouldn't be able to do the second part of  Confessions of a Recovering Trader trader tonight. While it is relatively simple to come up with posts on the market like the one you are currently reading or watchlists, CORT kind of posts require one to be in the zone and really into it. I promise to come up with the second part of the series soon. I apologize for the delay and hope you readers understand.

Take care and good luck trading!

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