Monday, August 5, 2013


Just like support and resistance are words tossed around by those looking to impress people at the local wine and cheese soiree, the word overbought is another one of those terms people use but don't understand.   If you look up the meaning (like I always do) you will get a number of interpretations.  Here are just a few with my two cents included of course. 

i: A situation in which the demand for a certain asset unjustifiably pushes the price of an underlying asset to levels that do not support the fundamentals. 

(When did any stock trade in accordance to its fundamentals?  Didn't AAPL have a $1000 price target?)

ii: A market that has advanced to a point at which, historically, it has tended to reverse and move lower.  

(This sounds like the definition of resistance doesn't it?)

iii:  The technical indicators on the security do not justify its current price 

(This is my favourite because its so ambiguous   When did technical indicators justify the current price of a stock since most technical indicators are a derivative of price?)

As you can see there is a fair bit of discrepancy in the definition of overbought.  I'm not saying that the term doesn't apply in the stock market but instead I recommend that you define it for yourself versus using the term loosely in an attempt to sound knowledgeable   I personal don't use the term because I don't view the market as overbought or oversold.  I view the market in terms of large market participants either accumulating or distributing stock.    Therefore, if the market has run up considerably I look for signs of distribution at predefined resistance levels.  I guess the only people overbuying this market would be the retailers during these times of distribution.  Maybe this term only refers to them?  

Enough of my digressions and lets see what the market has done this past week.  In our last post Wednesday we identified that the daily bars and volume were signaling bearish behaviour but until a break of support at 1684.3 happened that the prudent move would be to wait.  If it had broken support you would had all the evidence you need to confidently go short.  Aren't you all glad you listened because those that decided to jump the gun and short received a handsome helping of whoop ass as the very next day the market broke out of its trading range and busted higher into the 1700's for the first time ever.   I'd like to highlight a couple of things:

1: After the breakout notice how price dropped the following day to test the breakout area (yellow line)  before rallying to closing at the high for the day.

2: The increase in volume above support was actually accumulation and absorption of supply at this level preparing for the breakout.  

3:  Although volume has been dropping, today's small range red candle on low volume could be viewed as lack of supply vs lack of demand. 

So far there is nothing signally a stop to the current rally.  We will continue to read the bars daily and try to interpret how the market is positioning itself for the next move. 

Thanks for reading!  

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