Tuesday, August 24, 2010

The markets are oversold - How to play them?

Time to turn again to the McClellan Oscillator to find out if the markets are oversold yet. Getting right to it, here are the two year charts for NYSE and NASDAQ McClellan Oscillators. 

Well, there you have it. The markets are oversold. Now, as I always point out in such posts, don't take a bounce as a certainty just because the markets are oversold. Oversold can very easily become "more oversold". All an oversold condition means is that the odds of a bounce are high here and one should be careful while initiating new shorts or if you can take the risk, start initiating small long positions. Though in the current market state, you have to be really disciplined to do the latter as I expect any bounce to be a dead cat bounce and provide a good shorting opportunity. Such a bounce would provide a good opportunity to get rid of the long positions that you might still be stuck with. Another way to play the bounce, if it happens, would be to go long heavily shorted stocks such as GMXR looking for a short squeeze. Again, you gotta be a really disciplined trader in order to succeed in this.

For my take on today's market action, see "Key support level broken in NASDAQ".

Take care and good luck!

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