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Strategies & Market Trends : Playing the QQQQ with Terry and friends. -- Ignore unavailable to you. Want to Upgrade?

To: Kevin who wrote (359)	5/23/2005 10:03:47 PM
From: Walkingshadow	Read Replies (1) \| Respond to of 4814

Thanks Kevin. But I am afraid I must disagree with one thing: <<sometimes securities can push the overbought condition even further than "usual", but usually that's due to some sort of strong driving news (whether company-specific or industry-wide, depending on the given investment). >> This is conventional wisdom, to be sure. And there are many, probably the vast majority, who would agree with this statement. But I do not. I have posted the reasons in detail.... I'll try to find those posts. But in a nutshell, the reason is that when a stock or index is in an orderly trend in whatever direction, and momentum is steady (up or down), then you will typically see cycling of technical/momentum indicators from overbought to oversold, and the definitions of overbought and oversold are pretty definite. Overbought conditions are associated with stochastics above 80, and a stock or index trading at or near its upper BB rail. Oversold conditions are associated with stochastics below 20, and a stock or index trading at or near the lower BB rail. But when the trend and momentum are shifting, then this usually does not occur; there is bias both in where the stock trades within the BBs, and how much time the stochastics spend in the extreme zones. So, when a stock has been trading in a downtrend in orderly fashion, it might trade from one rail to the other, and stochastics might well cycle in orderly predictable fashion. But where there is a reversal, the stochastics will spend more time above 80, will drop down less and less, and will tend to trade in the upper half of the BBs, and use the middle of the BBs as support (and this region then defines oversold, NOT the lower rail). This is the rule, not the exception. So while we will see selling coincide with a move down in the BBs and the stochastics move away from overbought (+80), this move will be very limited; QQQQ will NOT trade all the way down to the lower BB rail, but will find support probably closer to the middle, and the stochastics will not get below 20, or if they do, they will spend miminal time there before rebounding sharply back up. I think this is an important point to realize with momentum indicators and measures of overbought/oversold status: these measures are NOT absolute, they are relative, and a shifting trend will always skew these and bias them in the direction of the new trend shift. The stronger the trend shift, the greater the bias. But there's more, and here is where I really break with conventional wisdom: in the case of an index, and often in the case of a stock as well, these things have almost NOTHING to do with news. That is, news is largely a red herring whose only purpose is to give talking heads something to attribute market behavior to in the absence of any real understanding of that market behavior. They can't just say "I have no clue!" after all, right? <gggg> Here's a post about this; I have a bunch of others somewhere: Message 21301491 T