Printing $1,900 for the S&P 500 Index, this question
strongly arises. Prior to answering it, let us find some background what
Overbought means:
It describes a situation, in which the demand for a certain
asset pushes the price to a level where it is attractive for the current
shareholders to sell out of the asset. By the initiation of an increased
supply, prices drop drastically; triggering stop levels set by other
shareholders, which results in an additional supply and prices drop further
until a balance between buyers and sellers is found.
For measuring overbought or oversold situations, two
technical indicators are commonly used:
Indicator-1: The Stochastic Indicator, developed by George
C. Lane in the late 1950s. Bullish and bearish divergences in the Stochastic
Oscillator are used to foreshadow reversals.
Indicator-2: RSI (Relative Strength Indicator);
developed by J. Welles Wilder and published in a 1978, which compares the
magnitude of recent gains to recent losses in an attempt to determine overbought
and oversold conditions for an asset.
However, by our experience those indicators carry a high
risk of a wrong interpretation for the price move of an asset. Surely, every
once-in-a-while you win and such, they are giving you a false sense of
security.
At the end of the day, there is no such situation as
overbought or oversold. Get rid of this concept entirely:
“Stock
prices can go as high or low as they want to go”.
Over 30-years of working with technical analysis, we surely
used Stochastic- or RSI indicators and developed a version of each, which
signals potential price turns; however, we do not use them, because those
indicators are producing signals with a random probability for success.
Graphic-1: SPY
Price Development with Stochastic Oscillator and NLT Signals
Graphic-1 shows the total opposite market readings and
actions of the Stochastic Oscillator (lower study) and the NeverLossTrading
systems: TradeColors.com and NLT Price Breakout Concept.
- TradeColors.com is our intro system to algorithmic trading, where you trade after the high/low of a two-candle-color-sequence is surpassed in the next candle.
- The NLT Price Breakout Concept indicates with black arrows when the price breaks long-term support or resistance (cyan zone) and you trade along with the price breakout.
When you trade, you are making an assumption for the future
price development of an asset. In helping you doing so, we share multiple
systems:
NeverLossTrading
Top-Line and HF-Trading
are for the pro trader. For allowing you to enter the market with a more budget
system, we are re-launching two of our concepts in an updated and modernized
version:
- NeverLossTrading WealthBuilder (for the swing traders and long-term investors).
- NeverLossTrading IncomeGenerator (for day traders).
The original concepts were developed based on Java-2008,
where trade indications were found by the alignment of multiple arrows from three
lower studies. To ease your chart reading, we compromised the lower studies
into one: The NeverLossTrading Balance of Power Indicator, which is highlighting
when buyers are in charge of the price action: Blue bars and sellers by red bars.
Changes in command between buyers and sellers lead to a print of buy or sell
signal, which are either confirming or adding to the powerful swing point
signal plotted on the price chart:
Graphic-2: SPY
NLT WealthBuilder Chart
A trade is only initiated when the high of a buy signal
carrying candle or the low of a sell signal candle is surpassed in the price
development of the next candle.
Working with such graphically displayed price predictions
will surely support your trading decisions. For keeping you engaged in the
market, we are offering an alert service, which identifies assets with the
favored chart setup: NLT
WealthBuilder Alert.
For allowing you an easy entry into the world of high
probability trading, we are offering a steep discount on the NLT WealthBuilding
and NLT Income
Generating systems (not published on the internet and only granted in a
personal consulting session).
In addition: If you later want to upgrade to one of our
professional systems: 50% of your tuition payment will be considered.
However: Our teaching capacities are limited.
To be part of this, schedule a consultation: contact@NeverLossTrading.com
If you are rather interested in day trading: NLT Income
Generator is the concept for you, using the same indicators while your teaching
and documentation is focused on the asset classes, you prefer to trade.
Graphic-3: Crude
Oil Futures traded with the NLT Income Generator Concept: Seven wins, one loss.
Regulated by SEC, we surely want to make you aware that
there is a risk in trading and past performance cannot always be taken
indicative for future results.
Learn NeverLossTrading: Schedule a personal consultation
without obligation:
Call: +1 866 455 4520 or contact@NeverLossTrading.com
Our answer to the question: Is the Stock Market Overbought?
- There is not such situation as overbought or oversold.
- Use a high probability indicator system that does not base decisions on overbought or oversold interpretations.
- Find and trade assets with institutional attention: NLT Alerts
- Have strategies in place to trade the markets to the up- and downside from any account.
