As readers know I like to look at a bevy of sentiment indicators and some overbought/oversold indicators. Interpreting these indicators is somewhat of an art because the ranges change. For instance, during the bear market the market generally topped out when the 10 day moving average of the ISE equity only would hit the 170 range. During the bull market it generally took a reading over 200 to signal a top and a reading of 170 was often a good buy point.
The same goes for the overbought and oversold indicators. A market becomes maximum short term oversold when the vast majority of the past 10 days had negative breadth readings. For instance, if 9 out of the past 10 days had negative breadth readings the market would be maximum short term oversold. In a bear market or bull market maximum short term oversold usually means that the market is good for a long trade. The difference is that in a bear market it pays to wait for maximum oversold readings while in a bull market there will be very few and one might need to jump in before hand.
I am not certain that we are in the same type of bear market that we were prior to March 2009 but this is definitely not the market many have gotten used to since March 2009. Luckily, I thought that May would be the start of an intermediate term move lower and have adjusted how I view the indicators.
Even though I have changed how I view the indicators, I have not adjusted enough as recency bias is very hard to overcome. Luckily, this has not cost me money but just some opportunity. In hindsight, Monday was a good short opportunity. The sentiment indicators did not get to where I thought they needed to but that is likely because I have gotten used to the recent range of sentiment indicators. In the coming weeks I believe it will continue to pay to err on the side of caution and expect lower ranges on the indicators.