Above is a chart of the percentage of NYSE stocks trading above their 10-day moving average (DMA). I like to use this chart to gauge potential short term bounces. The yellow arrow points to the most recent reading, and as we can see, it's nearing the oversold area. It's possible for the market to bounce when reaching the 10-20 area. A poke into the 0-10 range is a strong signal of an oversold market.
A few aspects of this chart to note:
- Oversold and overbought can remain in such states for long periods of time.
- This is not a timing chart and thus does not produce strict "buy" or "sell" signals.
- Overbought can stay overbought longer (way longer actually) than oversold. Oversold is typically a sharp jab up whereas overbought lingers as the bull trend expands.
- The best signals are when price diverges from the current reading. Example: price moves lower, but the number of stocks trading above their 10 DMA remains the same or moves higher.
- At best, charts are wind socks.
This post first appeared on my Tumblr blog.
