Sunday, September 12, 2010

Are the markets overbought here?

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 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!


Ying Tan said...

thanks for the post and it makes good sense to me. i bought vxx and tza way too early. debating whether sell them tomorrow or just hold on till profitable.

positiontrader said...

You are welcome Ying! I hope you don't mind me saying this but the sentiment of holding on to a position till its profitable is perhaps the worst reason to hold on to a stock. One has to understand that the market does not care for whether our position is profitable or not. Many an account has been blown up due to this very reason. Also, I hope you realize that with leveraged ETFs like VXX and TZA you are playing with fire. I personally avoid them but thats just me. Please be very cautious while holding them overnight unless you have a very definite strategy in place.

I hope you don't mind the unsolicited advice but I have made the same mistakes when I started out and hate to see others make them too!

Good Luck!

positiontrader said...

BTW, the above is not a recommendation to sell VXX or TZA tomorrow. Just my thoughts on holding on to any losing stock for the above reason.

Ying Tan said...

i think you are absolutely right. thank you again for the very good advice. i followed others in to those EFTs to hedge my equity mutual funds and a few stocks. but i am realizing that those are really beyond me. i would like to at least reduce my position to avoid even bigger loss.

since i really won't have much time for trading stocks, i should focus on a few intermediate to long term positions as summer break ends.

well so far i've paid big "tuition" but maybe its time to turn my money to someone else to invest.

positiontrader said...

If you want to learn Ying, I would recommend starting with a small amount that you can afford to lose completely. And also following anyone unless you understand what they are doing is never a good idea. You can take ideas from someone but in the end you have to make them your own plays with own entry and stop points. I have pointed out some books that have helped me on the top. And feel free to mail me anytime you have a question.

Good luck!