Is the Stock Market Overbought?

May 13, 2014 at 4:38 am Leave a comment

Printing $1,900 for the S&P 500 Index, this question strongly arises. Prior to answering it, let us find some background what Overbought means:

It describes a situation, in which the demand for a certain asset pushes the price to a level where it is attractive for the current shareholders to sell out of the asset. By the initiation of an increased supply, prices drop drastically; triggering stop levels set by other shareholders, which results in an additional supply and prices drop further until a balance between buyers and sellers is found.

For measuring overbought or oversold situations, two technical indicators are commonly used:

Indicator-1:     The Stochastic Indicator, developed by George C. Lane in the late 1950s. Bullish and bearish divergences in the Stochastic Oscillator are used to foreshadow reversals.

Indicator-2:     RSI (Relative Strength Indicator); developed by J. Welles Wilder and published in a 1978, which compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions for an asset.

However, by our experience those indicators carry a high risk of a wrong interpretation for the price move of an asset. Surely, every once-in-a-while you win and such, they are giving you a false sense of security.

At the end of the day, there is no such situation as overbought or oversold. Get rid of this concept entirely:

“Stock prices can go as high or low as they want to go”.

Over 30-years of working with technical analysis, we surely used Stochastic- or RSI indicators and developed a version of each, which signals potential price turns; however, we do not use them, because those indicators are producing signals with a random probability for success.

Graphic-1: SPY Price Development with Stochastic Oscillator and NLT Signals

Stochastis and NLT Buy Sell Signals

Graphic-1 shows the total opposite market readings and actions of the Stochastic Oscillator (lower study) and the NeverLossTrading systems: and NLT Price Breakout Concept.

  • is our intro system to algorithmic trading, where you trade after the high/low of a two-candle-color-sequence is surpassed in the next candle.
  • The NLT Price Breakout Concept indicates with black arrows when the price breaks long-term support or resistance (cyan zone) and you trade along with the price breakout.

In essence: Had you bought or sold SPY based on the Stochastic Indicator, you would be stopped in both instances, while the NLT systems lead you in the right direction.

When you trade, you are making an assumption for the future price development of an asset. In helping you doing so, we share multiple systems:

NeverLossTrading Top-Line and HF-Trading are for the pro trader. For allowing you to enter the market with a more budget system, we are re-launching two of our concepts in an updated and modernized version:

The original concepts were developed based on Java-2008, where trade indications were found by the alignment of multiple arrows from three lower studies. To ease your chart reading, we compromised the lower studies into one: The NeverLossTrading Balance of Power Indicator, which is highlighting when buyers are in charge of the price action: Blue bars and sellers by red bars. Changes in command between buyers and sellers lead to a print of buy or sell signal, which are either confirming or adding to the powerful swing point signal plotted on the price chart:

Graphic-2: SPY NLT WealthBuilder Chart

WealthBuilder Chart SPY Example

A trade is only initiated when the high of a buy signal carrying candle or the low of a sell signal candle is surpassed in the price development of the next candle.

Working with such graphically displayed price predictions will surely support your trading decisions. For keeping you engaged in the market, we are offering an alert service, which identifies assets with the favored chart setup: NLT WealthBuilder Alert.

For allowing you an easy entry into the world of high probability trading, we are offering a steep discount on the NLT WealthBuilding and NLT Income Generating systems (not published on the internet and only granted in a personal consulting session).

In addition: If you later want to upgrade to one of our professional systems: 50% of your tuition payment will be considered.

However: Our teaching capacities are limited.

To be part of this, schedule a consultation:

If you are rather interested in day trading: NLT Income Generator is the concept for you, using the same indicators while your teaching and documentation is focused on the asset classes, you prefer to trade.

Graphic-3: Crude Oil Futures traded with the NLT Income Generator Concept: Seven wins, one loss.

IncomeGenerator Crude Oil Example

Regulated by SEC, we surely want to make you aware that there is a risk in trading and past performance cannot always be taken indicative for future results.

Learn NeverLossTrading: Schedule a personal consultation without obligation:

Call: +1 866 455 4520 or

Our answer to the question: Is the Stock Market Overbought?

  •  There is not such situation as overbought or oversold.
  •  Use a high probability indicator system that does not base decisions on overbought or oversold interpretations.
  • Find and trade assets with institutional attention: NLT Alerts
  • Have strategies in place to trade the markets to the up- and downside from any account.

The investment that pays the highest return is the investment in you:

Entry filed under: Day Trading, Financial Market Investment, Investor Education, S&P 500, Stock Market, Stock Trading, Technical Analysis, Trade Alerts, Trading, Trading Success. Tags: , , , , , , , .

Identify and Trade Price Breakouts Three Months Stock Market Outlook to October 2014

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