Hello Rainier,
Hope you're enjoying the beautiful day in our wonderful State.
It' s more than terrific to see you and Dave kicking around ideas. This green horn loves it. Just came home for a quick lunch and market review. See you guys have been discussing overbought/oversold (O/O). Good subject.
Mindful that I'm a slow Norwegian, I find that O/O from a point and figure (P&F) perspective is simple and logical. You might take a look at it sometime.
Us P&F folks do believe in an expression of O/O as depicted and interpreted on our bullish % indexes, with no consideration given to price or volume. Time is depicted at the bottom of the charts, but is has nothing to do with the risk level or O/O. Additionally, and this is bragging, I've had phenomenal success using the NYSE bullish % and the sector bullish % indexes from their picture stories of being either in an overbought or oversold condition.
How's it work? Simple... Bullish % indexes range from 0 to 100% on a vertical axes. Each level or box is 2% above or below the previous, i.e., 50%, 52% etc. Further, every stock that is among those making up a particular sector is either on a buy or sell signal. (Another one of the beauties of a P&F chart.)
For simplicity sake, say there are a total of 100 stocks in our universe, and 50 are on a P&F buy signal. Further assume that our bullish % chart has been advancing in a column of X's (rising) and therefore the last X is at the 50% level. Now, let's further assume that eventually 70 of the stocks P&F charts go to buy signals. Thus, the bullish % index chart would now have a column of X's rising to the 70% level, which for us, is the beginning of an overbought market.
Think about it. 70% of all the stocks in a particular universe are on a clear buy signal. This index doesn't care twit about price or volume or float or anything other than that one simple criteria. (What other chart, besides P&F, has such clear buy/sell signals and such easy to construct trend lines? The more I look at'um the more I love'um.) And, buy/sell signals, whether double, triple, quad, etc., come hard. The great battle between supply and demand is being carried out on the individual charts (where price does matters) and then this information is transferred to the bullish % index.
Now, the higher we go above the 70% level means "who's left to buy". Well, often times at the higher overbought levels just the poor suckers who get their info from the TV talking heads, the cover of a magazine, or ----- no not at SI. They invariably buy high, sell low and wonder what happened. Or, they buy high and see if they can get some idiot to buy higher. No thanks. P&F charts and bullish % indexes keep me out of that crap.
Conversely, when a bullish % index drops in a column of O's to the 30% level, we consider it to be the beginning of an oversold market. The more sell signals on individual charts, the lower goes the bullish % index, the more oversold the universe, and then I'm licking my chops for the first reversal to Bull Alert. And when a bullish % index reverses, it's time to get on that train and kick some real butt! There's not many things more fun than taking money from the market. (I can only think of a very few.)
The bullish % index ---its simplicity is its beauty. This is my number 1 non-replaceable take everything I have but not this indicator indicator. Nothing comes close to giving me the confidence that bullish % indexes give me.
The late A.W. Cohen created the bullish % index in 1955 and Earl Blumenthal refined it. Cohen wanted an indicator that was bullish at the bottom and bearish at the top. Exactly the opposite of most charts that are bullish at the top and bearish at the bottom. He succeeded wonderfully.
Sector rotation, which I successfully employ using sector bullish % indexes as my basis of action, are based on an overbought/oversold designation. Usually from the 70%/30% levels. However, some sectors operate at thinner levels, so I let their history provide that info. We like to get into sectors when they are below the 50% level and ride them up. They are a thing of beauty these bullish % indexes.
There are a number of straightforward recommendations that one of my P&F mentor's, Tom Dorsey, memorialized in his book "Point and Figure Charting" relative to using the bullish % indexes. He further discusses an overbought, oversold condition far better that I ever could. There's a bullish % chart and explanation at dorseywright.com.
I'm rambling, so it's back to work for me.
Take care,
Eric |
