FEB
09
Overbought…Oversold = Hope Strategy
Filed Under (Trading Skills) by Deepak Singh on 09-02-2011

We keep hearing everyday: Market is oversold and hence we can see a 300 point rally on Nifty. This is most absurd logic one can give
Overbought and oversold are the two most useless indicators in technical analysis; and that’s why I rarely talk about them. This is not the first time I am saying this. As recently as last month in my Jan 09 notes I made this comment: The only hope Bulls have now: market is extremely oversold in near term. But remember, oversold market is no guarantee of rally. Now a month has passed and the argument still holds true.
Need Proof: See US market
US market is as overextended or overbought it can get and yet day after day - US market is only inching up. Anyone who is shorting must be getting killed.

What you are seeing above is: Melt up i.e. as market is moving up it is sucking in more people and leading to increased conviction of bulls
Have a look at Nifty Chart
It’s quite reverse of US market. It’s just going one way down…oversold is getting more oversold. The reason: With every down day, more and more people are giving up on the market

Conclusion

Market always moves in a direction that causes maximum pain to maximum number of people. The pain = Lack of Action. When market moves up, lots of market participants watch with disbelief till they finally give up and jump in. That’s when the tops get formed. Similarly, when market is going down, people hold on to their stocks and watch market action in disbelief till they finally give up. That’s the market for you and the price action tells the real story not cute analysis of analysts.
Remember, when Indian market was going up, many so called analysts were busy talking about TOP and how valuations are stretched but to their dismay, market continued moving up. Now, the same crowd is calling market bottom everyday…on argument that valuations are attractive and market is oversold and yet market is going only one way and i.e. down. The problem: This kind of approach fights the market all the time. Market will do what it has to….and no one knows where the bottom is and when market will turn till the market actually turns on the screen.
Overbought and Oversold analysis is strategy of HOPE. Now, one day market will turnaround but who knows where. One should be vigilant to spot turnaround but not Trade on HOPE that market will turnaround.

courtesy - stateofhemarket blog

Hi rajaram, Markets look weak, would be better to exit from it

Hi Sumeet, can give a bounce from 35

Hi ram, yes

Hi anivesh, not yet

Hi SIVA, yes

sir shall i short hindlaco at current level?

i need to find some way to make some profit.

I am in huge huge loss :(

HI Kartik, ..ok.. true enough... Can short v..bank to morrow ... slightly higher..pl?

Kartik,

Rel Infra, Commu and Power all falling down too much, should I keep or exit now?I am already on 50% losses in all these scripts...please advise...3.5 laks gone in water..chit

thanks for your response in time.have a good day.see you tommorrow.