Monday, March 21, 2011

Poised for an oversold rally

I wrote about this trading model from Trader's Narrative before last week. The model, which uses the 50 and 150 day moving average in a rather unique fashion, moved to an oversold condition (ratio of 0.50 or less) and is in the process of rallying off that signal.

As I don't have the exact figures for the signals and for the market. I eyeballed the charts for the past instances of rallies off an oversold condition, it appears that such conditions have been good for rallies of at least two weeks and the magnitude of the rallies for those two weeks have been in the 5-10% range.

Sentiment models also offer support for the bull case. Sentiment readings from different sources also indicate that investor bullishness has pulled back from excessively bullish extremes. In some cases, they are at or near "buy signal" territory.

To be sure, geopolitical events surrounding Libya and Bahrain are likely to add to near-term market volatility. Nothing goes straight up or down, but if this trading model is correct then equity prices will have an upward bias for about two weeks.

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