Identifying Overbought Markets

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The Block Uptick-Downtick Ratio is used by technical analysts to gauge institutional investment activity by measuring the percentage of block trades which result in an uptick versus the block trades which are executed on a downtick. The idea behind this ratio is the belief that a block buyer would initiate an "uptick", or a bid up in the securities' price, and a block seller would initiate a "downtick," or a bid down in the securities' price. Technical analysts view a decline in the Block Uptick-

Downtick Ratio below 0.70 as -

an indication of an oversold condition, and an increase in the Block Uptick-Downtick Ratio above 1.10 as indicative of an overbought condition.

The "Diffusion Index" is a measure of market breadth, and is defined as [(# of advancing issues + 1/2 # of issues unchanged) / # of issues traded]. An increase in the diffusion index is indicative of an increase in advancing issues relative to declining 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% is viewed by contrarian technical analysts as overtly 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.

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.