Waiting For The Extremes

The market has not had a good overbought reading since the first day of May. Had yesterday been an up day we would have had a decent overbought reading. This is a far cry from what occurred from September through March. In that seven month period there was only a single good oversold reading, following the Japanese earthquake. The market had too many good overbought readings to count.

For seven months it did not pay to wait for a good oversold reading because they did not happen. The recent action fortifies my belief that the market has changed. I believe it will now pay to be patient and wait for the extremes. Last Summer saw four meaty rallies that started from bearish extremes.

The following is what the ideal bearish extreme would look like:

  • A 10 trading day period where the vast majority of days are down. The bigger the down days the better.

  • During that 10 day period there should be a lot of put buying

  • A spike in the VIX

  • End of the World talk from pundits.

  • Extreme bearishness in the sentiment surveys

  • Rydex traders positioned very bearish

Currently none of these conditions have been met as we only had a single down day. That does not mean we can't rally, only that I believe there will be better risk/reward opportunities this Summer.


Fred Ngo said...

Hello, you often say "oversold/overbought" in your analyses. To which indicator are you referring when you say this?

Tsachy Mishal said...

The 10 day moving average of the NYSE Advance-Decline line