Any basic technician of stock market (or any other market) will tell you two simple things:
These are relatively simple directions. However, like most things in trading they are so that easy to follow and execute in action. Why? Because a dip is scary when you are in a dip!!
Lately in the US stock market, such an event is happening. After rallying, which seems like for an eternity, US stock market, seems to correct back to its moving averages. Here is the chart below I am using Nasdaq 100 index (or /NQ futures, as what I commonly trade) as an example. There is nothing particularly critical about Nasdaq 100, as all major broad based indices are showing similar pattern.
This chart goes back to year 2020 (yes the year we all want to forget), just to show the March 2020 Covid low. At the time the market dipped well below its 50 day Exponential Moving Average, which is the magenta line here. Then there was a sharp bounce from the depth of Covid crisis, and it promptly rallied above 50 EMA. It didn't touch its 50 EMA until Sep 2020! Then again in Nov 2020, around the US general elections, and then now. So in the last 14 months, the prices touched or were below its 50 EMA in March 2020, Sep, Nov and Feb 2021. If you consider the Covid dip as an erratic event. Then out of 200 trading days in a year, the market was below 50 EMA only about 18 days. That ladies and gentlemen, is a bull market.
If this is a bull market (as of now it is, but we don't know the future), then being oversold is a blessing if you have some cash at hand. There are many indicators out there which helps you to identify an oversold-overbought market. They are mostly called oscillators. I am using stochastic oscillator here. An oversold is a reading below 20 on the stochastic oscillator. I have marked on the chart all the times the market was oversold. It is now oversold. Also it is taking support from its previous high at 12500, a nice round number!
Caveat to this (there is always a caveat), is that the oversold reading can stay oversold for a long time. Just take a took at Covid low. The market went oversold in late Feb, and stayed oversold all the way till early Apr. That is about 1.5 months. It can stay oversold longer, and especially long if the trend changes from up to down! If we enter a bear market :)
We DON'T. But we don't try and predict it. If we see that the market is oversold, we assume it is oversold in an uptrend. We can enter the market with a stop. If we are incorrect, and the market goes down without a bounce we simply take a loss and move on to the next trade. Peace out!! :)
Disclaimer: This is NOT professional advice, this is all just my own opinion and experience. I am NOT a Certified Financial Adviser. Consult professionals for any financial, accounting or legal related questions you have.
Charts are created in Tradingview.com, which is a free service.
