What does being overbought really mean?

Another day of small gains for the bulls. Like I have found myself saying many times in the past few days, you just gotta admire the resilience shown by the bulls here. This market just won't go down. The only silver lining for the bears here is that S&P hasn't joined the NASDAQ in making new highs. At least not yet. And in case you were wondering, yes, we do keep on getting more and more overbought. But who cares? We have been that way for more than a week now. As a short term trader, it's imperative that one thinks in terms of probabilities, and not certainties.

What does being overbought actually mean? Does it mean that a pullback will happen tomorrow?  No!  Certainly not. Those of you readers who have been trading since 2007, surely know that oversold can very easily become "more oversold" and overbought can easily turn into "more overbought". All that an overbought condition is telling you is that the probability of a pullback is high. And as we get more and more overbought, the probability of a pullback becomes higher and higher.

While it is important to remember the above while trading, as short term traders it is even more important to trade what the market is giving us at that instant, rather than expect the market to behave as we think it should. Go with the flow but remember the dangers that lurk underneath. Despite knowing the market has been overbought for quite some time now, I have continuously been going long and making profits that way. But knowing that the market is overbought, makes me aggressive in taking profits off the table and not being too aggressively long overnight. 

I wrote what I think was a pretty decent post, a short time ago, about the above - Trade what you see, not what you think. Check it out if you haven't done so already!

Personally speaking, my LCC position started the day off well, and I got out at 8.10 for a little over 5% gain. Seeing the strength in regional banks, I took a position in CSE at 6.02 but soon got stopped out for less than 1% loss. The markets went red after that, at least the DJI did, but liking how the market just refused to bow down, I again took a position in LCC,  this time at 7.95. I still own my SDS hedge position, so don't really care about which way we open tomorrow. 

But something's gotta give pretty soon - either 1150 breaks or we get a pullback. What will it be? This is not the important question at all. The important question is what will you do in either of the two scenarios. Think about it!

I will be back with some charts later tonight. Take care and good luck!