Monday, October 13, 2008

Chart of the Day: Historically Oversold Market

Oversold markets are tough to time. The problem is that sometimes, oversold markets simply get more oversold, and then you are quickly underwater on the buys you make. Fortunately, you know that I have been sitting tight on the cash I had built up, so at least I didn't try to pick a bottom.

That said, I saw the following graph over the weekend on TheStreet.com's website. It shows a monthly graph of the RSI indicator (relative strength) for the S&P 500 going back to its inception in 1928.

If you look at the graph (I think you can click on it to enlarge), you'll see that the RSI has only dipped below the 30-level three other times throughout history. Those instances were: 1929, 1973, and 2002. All of those were at or near market lows, and pretty good buy opportunities for patient investors.

While looking at how oversold this market was getting, I quipped that we could easily see a +1000 point rally in the Dow. Today, the Dow rose a record +936 points. Unfortunately, it only erases 2 days worth of damage. But all rallies have to start somewhere, and this bounce could go a little more before the oversold condition is fully alleviated.

I did not put new money to work today. I would rather use a further bounce to sell some of the things I no longer want to own, and then look to use pullbacks and retests to add to stuff that is holding up well. I also want to see how stocks react to earnings reports that start in earnest this week.

They say bear market rallies are always the most vicious. Today was a nice respite...let's hope it wasn't a one-day wonder.

1 Comments:

At 12:07 AM, Blogger myinvestorsplace said...

I think trading will likely remain difficult and all trades should be very short-term in nature.

MyInvestorsPlace - trading, value, investing, forex, stock, market, technical, analysis, systems

 

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