The Canadian Technician

What does overbought look like? Can it continue?

Greg Schnell

Greg Schnell

Chief Technical Analyst, Osprey Strategic

Sometimes, the market goes on a tear. Recently, it has moved up fast into what some would call overbought. Markets can stay overbought for a long time, so that is bullish not bearish. But a few indicators identify 'severely overbought'. 

There is a variety of indicators that one can use like the % of stocks above the 10 DMA.

I have a few that I like. Here is one that will remain mysterious so we can explain it without prejudice.

Screen Shot 2012-09-13 at 11.19.07 PM
So the indicator is on top, and the $SPX is below.


You can see it really blew above all the levels it hit the last 8 months.  Doesn't seem very meaningful in this context. All the other highs didn't really indicate anything. But this is super high...Maybe lets add more data and see if it has been here before.

Screen Shot 2012-09-13 at 11.14.50 PM
Here is almost 4 years of data. There have been 5 single bursts above the blue line, and one cluster that remained above this level. The green vertical lines have been placed off to the side so you can see the spikes and the corresponding $SPX reaction.

The vertical spikes led to 50-100  spx point intermediate pullbacks. Obviously the cluster  of spikes just kept flying. When the market topped after the cluster, it just dropped and the market pulled back a lot. 2 other verticals led to major drops that fell hard. You can see the Fed spike today created the highest spike in four years. Not sure about the correlation of how high the spike is to the lack of buyers.efunds

Perhaps when the market gets so run up, the hedge funds decide to wait till the market diplays some weakness.

So what is the mystery indicator? What it represents is the difference between new highs and new lows. Regular levels of this indicator don't mean much, but huge highs and huge lows are usually indicative of something. 

$NYHL 20120913
Anyway, this is the highest reading in 4 years which would lead me to be more cautious here.  

Just sayin'.

Greg Schnell, CMT

 

Greg Schnell
About the author: , CMT, MFTA is Chief Technical Analyst at Osprey Strategic specializing in intermarket and commodities analysis. He is also the co-author of Stock Charts For Dummies (Wiley, 2018). Based in Calgary, Greg is a board member of the Canadian Society of Technical Analysts (CSTA) and the chairman of the CSTA Calgary chapter. He is an active member of both the CMT Association and the International Federation of Technical Analysts (IFTA). Learn More