Successful traders instruct to a greater extent than rational when they instruct to a greater extent than uncomfortable. That feeling of discomfort is non a telephone telephone to act; it’s a telephone telephone to excogitation a class of action.
In the past times 5 trading sessions, we’ve moved from a province of affairs inwards which fewer than 20% of SPX hit got been trading higher upward their 20-day moving averages to ane inwards which over 80% hit got exceeded that benchmark. That is quite a shift inwards breadth inwards a brusk menses of time. I flora myself feeling uncomfortable amongst my long position; it seemed every bit though anything that’s moved that far, that fast is due for a pullback.
So I decided to cash inwards one’s chips to a greater extent than rational. I went dorsum to 2006, when I starting fourth dimension began collecting breadth data, together with looked all occasions inwards which the higher upward criteria were met inwards a sub-20 VIX marketplace together with what happened inwards SPX going forward. There was alone ane problem: it had never occurred over that fourth dimension span. This was a greater five-day breadth thrust than nosotros had e’er seen inwards a sub-20 VIX market.
I thus decided to hit got a mo tack. I looked at five-day breadth thrusts exceeding the grade of l nether sub-20 VIX conditions. That is, the percent of stocks trading higher upward their 20-day moving averages had to motion over 50% inwards a 5 hateful solar daytime period. Still, I alone flora ix non-overlapping occasions. Over the side past times side 3 trading sessions, 8 occasions were up, 1 downwards for an average gain of .65%. It’s likewise modest a sample to brand for a statistically pregnant analysis, merely it sure enough did non back upward the origin of my discomfort. It did encourage me to await farther into breadth thrusts together with the toll paths of the marketplace when breadth moves higher, sharply.
My observations? Not all rigid markets are “overbought”. How nosotros attain rigid breadth readings is every bit of import every bit the absolute grade of those readings themselves.
Further Reading: Perspectives on Breadth