Overbought Market Indicators for Technical Analysis | Bullfighter.com

Overbought Market Indicators

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Question

A technical analyst with Bullfighter.com, a noted investment research firm, has been examining the U.S. securities markets, and believes that the market is technically "overbought." Which of the following technical indicators would this analyst likely use to support his opinion? Choose the best answer.

Answers

A. The CBOE Put/Call ratio is greater than 50%.

B. The % of futures traders bullish on stock index futures has increased significantly.

C. All of these choices are indicative of an "overbought" condition.

D. The ratio of short sales by specialists is less than 50%.

E. The diffusion index has declined significantly.

F. The % of issues trading above their 200-day moving averages is greater than 80%.

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Explanations

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A. B. C. D. E. F.

The % of issues trading below their 200-day moving average is frequently cited by technical analysts as a measure of oversold and overbought market conditions.

Specifically, technical analysts see the market as "overbought" when 80% of issues are trading above their 200-day moving average, and consider a market

"oversold" when 80% of issues are trading under their 200-day moving average.

The "Diffusion Index" is a measure of market breadth, and is defined as [(# of advancing issues + 1/2 # of issues unchanged) / # of issues traded]. A decline in the diffusion index is indicative of an increase in declining issues relative to advancing issues. The CBOE Put/Call Ratio is a contrarian technical indicator used to gauge the sentiment of investment professionals, and a ratio greater than 50% would be viewed by technical analysts as bullish. Finally, contrarian technical analysts would view a large increase in the amount of futures traders who express bullish sentiment on stock index futures as a bearish signal.

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