I’m non a big fan of damage similar “overbought” together with “oversold”. Too often, those damage embed a bias–that the stretched marketplace pose is probable to snap back. Similarly, i mortal looks at a nautical chart together with notices “consolidation”; exactly about other perceived “topping”. There is a lot of room for subjectivity inward how nosotros label what nosotros see. That’s a proficient argue to await at many things amongst a fresh educate of eyes. We’re less probable to autumn victim to confirmation biases if nosotros persuasion the globe through multiple lenses together with invite data that doesn’t neatly gibe into our views of the moment.
Above is a nautical chart of the ES futures. Each indicate on the nautical chart represents 50,000 contracts traded. On busy days, nosotros impress to a greater extent than points on the chart; dull days impress fewer. Similarly, the busy times of twenty-four hours impress to a greater extent than points than the slow, midday hours. This normalizes, to exactly about degree, volatility inside together with across days. I farther induce got volatility out of the motion-picture demo yesteryear only recording whether the average cost of each book bar is upwardly or downward relative to the prior bar. The nautical chart is an 80-bar moving average of this up/down count. It tin endure viewed every bit a relatively pure mensurate of cost momentum.
When the 80-period average has been inward the transcend one-half of its distribution, the adjacent xl bars induce got averaged a gain of +.15%. When the average has been inward the bottom one-half of its distribution, the adjacent xl bars induce got averaged a loss of -.01%. If yous await at the nautical chart closely, you’ll run into the argue for this momentum effect: early on inward a marketplace pose cycle, nosotros run into a surge inward upside momentum, which stays positive but wanes every bit the wheel matures. Eventually nosotros become negative momentum, leading to a crescendo of downside cost modify presently earlier nosotros hitting a cost low.
Seeing where we’re at inward this procedure gives a proficient read for where nosotros stand upwardly inward the introduce marketplace pose cycle. Much of the upside campaign inward the marketplace pose tin endure attributed to momentum next rigid positive readings together with value/reversal next rigid negative readings. Tracking these helps us arrange to the phases of a marketplace pose cycle.
Further Reading: Finding Opportunity inward Market Cycles