4.6.2009 - "Overbought" and "I've Been Bearish"

During this whole rally, I have noticed that a number of technical analysts I stumble upon indicate how things are "overbought" and how their readers surely know that "I've been bearish since late 2007/early 2008." The latter is more of an appeal to authority (a logical fallacy) to justify their opinions that this market should be sold. Of course, it should have "been sold" at about 740, and 775, and 800, and 820, and so on. Past performance is not an indication of future results, but that is the part they leave in the fine print.

Momentum studies (what are usually considered when something is "overbought") are created by price. Reversals are created by price. There is no reason that price must reverse because momentum is extreme or softening (in fact in a strong market momo will wane while the price holds - sound familiar?). Instead, momentum trends (which are not price trends) should be used to validate a price reversal, not vice versa.

That said, I think it is reasonable to look at other indicators like stocks trading over their 50 MAs, etc., to see how price is extended. Even then, however, it only means to exercise caution. It does not mean to sell.

Indeed, there are some measures that show the market gaining strength and is not "overbought".

I am not saying that the markets will continue to rocket higher immediately. We may get a pullback. We may even get a fairly deep pullback (although the latter would really cripple the integrity of this rally at that point). We could even get a retest of the lows or lower. However, at this point, the price is not saying to short. In fact, to me, it is saying quite the opposite. Until the price confirms otherwise and proves me wrong, this looks like consolidation to continue higher. I have previously (today even I think LOL) stated that it is easily possible that the gap immediately below us will not fill until the market achieves 875 or so. Not a certainty, of course, but easily within the realms of possible scenarios.

Thus, we may get a reversal, but let the price do the work, not our preconcieved notions and/or the things that tell us how strong a price move is relative to its recent past.