Severely Overbought Market: What Does It Really Mean?

By Lawrence G. McMillan

There are several ways to measure an overbought market, and we’ll review many of them in this article. It is common knowledge that overbought markets eventually sell off – sharply, in most cases. But how long can a market remain overbought before it actually begins to decline? As it turns out, an overbought market can exist for quite a while before succumbing. Thus, it is important to wait for the overbought condition to abate and for actual sell signals to occur, before one ventures in on the short side. One won’t sell the absolute high this way, but he will avoid shorting into a constantly-rising market.

In this article, we’ll review the “standard” indicators that register overbought conditions, but we will also look at some others that are not quite so obvious – such as volatility measures...