Tuesday, September 17, 2013

Are the markets overbought?

With the sort of rally that we have had in the last 10 days or so, it is perhaps time to step back and look at whether the markets are overbought here. And as the regular readers of this blog will know, that means time to turn to our trusty ol' McClellan Oscillator. Below is the two year daily chart of the NYSE McClellan Oscillator.

From the above chart, it seems that the markets are quite close, right at the doorsteps rather, to entering overbought territory. That doesn't mean that the markets cant edge higher from here. "Overbought" can very easily turn to "more overbought". July 2012 in the above chart would be a case in point. As you know, the market deals in probabilities, and not certainties. All that the above chart is telling us is that the odds favor a pullback here. 

With the kind of rally we have had in the last few days, and markets approaching important resistance levels in all time highs, and considering the above chart, it makes sense to just consider the risk to reward ratio here.

Take care and good luck!

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