Wednesday, July 28, 2010

Markets not overbought anymore

A couple of days ago, in fact even yesterday, I had remarked that there were couple of ways a market could work itself off from overbought conditions like we found ourselves in after Monday - a sharp pullback or a period of consolidation preferably on low volume. Now that the latter is exactly what has happened in the last couple of days, let us check on how overbought are the markets now.

Let's start with the NYSE and NASDAQ McClellan Oscillators as usual. I have market the overbought levels and also the level where we found ourselves on Monday. 

As we can see, the markets have done a great job of working off the overbought conditions and we are not at overbought levels anymore. That doesn't mean that we go straight up from here but after the action on Monday, the odds were definitely in favor of a pullback and after the last two days, the odds are slowly increasing for the rally to continue. While trading the markets, it's very important that one thinks in terms of probabilities rather than certainties but we will save that discussion for another day. Right now, let's have a look at some other breadth indicators to see if they support our line of thinking that markets are not overbought anymore.

First up, are the Nasdaq and NYSE Advance-Decline Issues.

The above indicators, which were also at extreme levels after Monday, confirm that the markets are not overbought anymore and inf act, are getting close to levels from where we might see a bounce soon.

Now let's move on to the Nasdaq and NYSE Advance - Decline Volume.

These charts also tell the same story - the markets are not overbought anymore.

If you haven't read it yet, here is my daily review for today and the strategy for tomorrow. I will be back later tonight with some setups for the watchlist.

Take care and good luck!

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