Overbought Aftermath

By Lawrence G. McMillan

We often say that it is positive for an emerging bull trend to get heavily overbought – that this is an indication that the rally is strong and broad. In this article, we’re going to put that statement to the test by identifying (and quantifying) severely overbought markets and seeing how they performed up to 100 trading days later. This should provide some solid evidence of whether we need to relish or fear a severely overbought market.

We normally define an overbought condition by the levels of the two breadth oscillators that we follow – the “stocks only” oscillator and the NYSE-based oscillator. For those not familiar with them, we’ll define them and then move into the analysis of overbought conditions...

Read the entire "Overbought Aftermath" article (published 9/28/12) by subscribing toThe Option Strategist Newsletter.