After another impressive show by the bulls last week, its time to check whether the markets have reached overbought levels and that means turning to our trusty old McClellan Osscillator once again. As the regular readers of this blog know this indicator has served us well in the past in determining oversold and overbought conditions. Attached below are charts of NASDAQ and NYSE McClellan Oscillators respectively with the overbought levels marked.
As we can see, the markets have not reached overbought levels....at least not yet. Now, what does this actually mean? Does this mean that the market will go up from here? No! Actually, let's make that an emphatic NO! The markets do not work in terms of certainties. There is no indicator out there that can tell you for definitely what a market will do next. That's why it is so important to have a probabilistic mindset when it comes to trading.
What the above charts are telling us is that the markets have not reached overbought levels. And why is that important? An overbought market can easily become "more overbought" but when the market reaches overbought levels, it implies that odds favor the bears now and its time to take some profits and be cautious while starting new long positions. Clearly, the markets haven't reached that stage yet!
In case you missed it, here are posts on how to set stop loss points and sector analysis from earlier this weekend.
Take care and good luck!