How Extreme Oversold Markets Can Be Profitable
The trading week was starting to look as though it was going to end without any excitement. Wow, did that ever change on Friday!
On Wednesday Aug 24th, the stock market sold off to a level which I consider to be an extreme oversold condition for the week. While I do have several criteria as to why and how I come to the conclusion, the chart and indicator below show me when the market is oversold and ready for a bounce.
The green shaded areas on the bar chart are oversold extremes. Wed, Aug 24th the SP500 closed at this extreme. The following day the market struggled to find support but eventually did with the big pop in price on Friday.
You will also notice the red line indicator near the top of the chart. This is a little volume ratio I use to help confirm when the market is getting overbought and profits should be taken.
Second Oversold Confirming Indicator – Price Spike
Not only was the market oversold based on my proprietary indicator above, but the market also flashed us a post-market price spike. I have talked about these many times before and how it’s the market giving us insight into where the computers are likely to run the market or at least try to run the market in the next 48 hours. In less than two days the spike was filled for us to pocket another winning momentum trade.
Extreme Markets Conclusion:
In short, as traders we need to trade what see not think. It is easy to have market bias, meaning you want it to go in one direction and you favor your thinking and analysis that way. If you can completely avoid doing this, you will be highly profitable as a trader.
I see this time and time again, when the market gets oversold/overbought, or flashes us a price spike just before some news event. Its tough trading in front of pending news, but 80% of the time these moves play out just as expected.
The last big FED talk, gold flashed spike up a day before the news and it played out in a big way. This week both the SPY and GLD spiked up a day before and both reached their spike targets Friday big fast profits. I will post the gold spike on my blog this weekend.
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Chris Vermeulen
