Wednesday, March 30, 2011

Are the markets overbought here?

Its been a great couple of weeks for the bulls and its now time to turn to McClellan Oscillator to see if the markets are overbought here. While an indicator that calls tops and bottoms perfectly does not exist and will never exist, McClellan Oscillator in my opinion, is fairly decent in determining overbought and oversold conditions. The overbought levels are marked on the Nasdaq and NYSE McClellan Oscillator charts below.

 While the markets still haven't reached overbought levels, another up day and we will be there. The Nasdaq oscillator, in particular, is at its highest levels since September.
Please remember that overbought is not the same as a top. An overbought market can easily become "more overbought" just like an oversold market can easily become "more oversold". Then why is it important to determine overbought and oversold conditions? The answer lies in risk management. Following is the link to a post I wrote last year on how to play overbought markets, which happens to be one of the most read posts of the blog.

Take care and good luck!

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