At the expense of looking silly, I want to go back to the basics and first try to identify what the true meaning of "overbought" or "oversold" really is.
What does it mean to have an issue overbought?
What does it mean to have an issue oversold?
Many people will probably have different answers that will revolve around a central concept. For the general consensus, it appears to mean that an "overbought" state is one where the price has gotten too high. What does that really mean? For many stocks, prices usually go even higher. Buy high, sell higher. The problem is, if there's continued demand for that price, regardless of its height, that issue is still going to move higher. That's William O'Neil's style (buy high, sell even higher), along with a number of other investors who have found much success in the market.
Shouldn't a truly "overbought" state be better defined as "a condition where all the potential buyers at that price range per given time period, have already made their purchases such that no further demand exists at that price?" If there are no more buyers, then that really means it's been as bought as possible, right? In other words, overbought? And vice versa for oversold.
If this definition of overbought/oversold is agreeable, what then is our next step? I think the following factors will be necessary for a more complete picture: volume, momentum, perhaps float analysis here would also help, and a couple more factors. What factors are those?
Regards,
Rainier |
