Well, I am writing this at 12:14 PM, afternoon. I do not have any intra day positions, although my Swing Trades (long in Nifty, Renuka & Dena Bank Futures for past few days) are ok. I had mentioned in an earlier post that day trades are coming down, at least for me.
So far, the Nifty has been insde a narrow range today - between 6328 and 6295, just 33 points. hence a dull day. This can also be called range contraction. Markets move into Expansion after a period of contraction. In the 5 minute time frame, we can expect a big move, soon enough.
Yesterday, I had asked readers to avoid buying in Silver since the metal prices rise was becoming a bubble. Today, Silver is down by Rs 2000 about 5 percent. We need to see a significant correction in the metal before another attractive buying opportunity emerges.
What does an overbought oscillator suggest?
Rob Hanna from Quantifiable Edges says this:
Most swing traders understand that the market has a tendency to oscillate. In other words, strongly oversold conditions will often lead to a bounce and strongly overbought conditions will often lead to a pullback. The trick in trading a swing time frame is understanding when the likelihood to reverse is strong and when it isn’t.
Trying to sell short when an uptrend gets overbought can be a dangerous endeavor. Often there will be no downside edge when trying to short into an overbought condition in an uptrend. When the market is strongly overbought due to a sharp acceleration in the trend as occurred late last week, it may even suggest an upside edge.
In any case, the point is that though the market is short-term overbought, this is by no means an ideal short setup. And in general odds seem to favor a continuation rather than a strong, immediate drop.
My Notes: The study had a simple rule: SPX (S&P) closes above its upper Bollinger Bands for the second day in a row. It also closes at a 50 day high in the last 2 days. The strategy is to buy at close and exit after X days. Mr Hanna tested X from 2 to 10 and found all days profitable, with the profits increasing if you hold for at least 3 days.
The point he made was: what seems overbought can become even more overbought. Therefore, rather than consider overbought and oversold, consider trend. This is what I tell my clients, seminar participants.