This article was originally published in The Option Strategist Newsletter Volume 13, No. 22 on November 24, 2004.
This post-election rally has been a strong one and has produced extremely overbought readings – especially among indicators that use market breadth, such as our breadth oscillators or the Arms Index. In fact, the “stocks only” breadth oscillator recently registered the third highest reading in its history. We have often told you that such overbought conditions at the beginning of a new bullish phase are positive, not negative, indicators. In this article, we’ll quantify that statement by showing how the market performed after previous extremely overbought readings.
This article was originally published in The Option Strategist Newsletter Volume 3, No. 22 on November 17, 1994.
Traders in all markets often attempt to determine if a rally or decline has moved "too fast". If a rally has moved "too fast" or gotten ahead of itself, one often say that the stock or futures contract is overbought. Similarly, if a decline has been "too steep", then the underlying security is oversold. The hard part comes in determining what is "too fast" or "too steep". There are many technical indicators that attempt to measure the rates of advances and declines in order to determine overbought or oversold.
