Sunday, December 12, 2010

Are the markets overbought here?

With there being a lot of talk on the markets being overbought out on the blogosphere and twitter, I figured it was time to turn to our trusty ol' McClellan Oscillator for answers. Following are the charts of NASDAQ and NYSE McClellan Oscillators with the overbought levels as marked.

From the above charts, it can be easily seen that the markets are nowhere close to overbought levels, at least according to the McClellan Oscillator. This makes sense to me at an intuitive level as although the market has closed positive on almost all the days this month, there have been extended periods of consolidation with very little gains during this run. The reading on the above indicator does not mean that the market will continue going up (I wish it was that simple!), just that the odds do not favor the shorts just yet.

Also, please do remember that shorting a market, let's make that any market, just because you think that the market has gone up too much, is the worst possible reason to short. Calling tops, or bottoms for that matter, is a fool's game. If the market does reach overbought levels, and you do wanna short it, it's best to scale into your short positions rather than take the entire position all at once. Here is a post I wrote on playing overbought markets a while back, which, in fact, happens to be one of the most read post of this blog. Hope it is of some help to you new readers out there!

I will be back later with a watchlist for next week and also the Chart of the Day.

Take care and good luck!

1 comment:

Bill said...

i agree that the market as of now is not heavily overbought but this much consolidation can easily lead to low volume side ways trading which is what i suspect will happen up until new years. Expect some choppiness but most days will likely have less than 100 pts movement for the Dow, less than 10 for the S&P. The Nasdaq however seems more volatile than the others and we might see some higher beta for the Nasdaq.