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Overextension

Does the USA sill have something left in the tank?With the recent news of the FED being close to a new rate cut, it's important to start considering the possibility of the market going even higher. However, it's hard for price to keep pushing up when it's already overextended. Not saying this doesn't happen because it does. Price does tend to break the rules of statistics, given the irrationality of people. However now that most stocks are currently in an uptrend, it's hard to believe this performance will continue for much. It's likely that several stocks will begin to start forming downtrends, pushing the percentage of stocks in an uptrend down. When looking at the chats, the cyclicality of growth spurts is quite notorious. However, not every time that a down turn in the index is followed, the vast majority of stocks being in an uptrend. Although this does tend to happen, as I've circled here in many examples. However, other examples don't show this same pattern and instead see price move even higher. This is because using the percentage of stocks in an uptrend as an indicator is not painting a full picture. Even if many stocks being going into downtrends, the force and extent of which these trends form is what actually drives price action in the index. So we should expect several stocks to begin underperforming in the next couple of days. But if the stocks that have just recently entered an uptrend keep providing strong results, it's still possible for the index to keep on going higher. The direction of the index will depend on the strength of the new form trends and the soon-to-be formed downtrends.
CME_MINI:ES1!Long
by DarkMessiah777
Mexico gives a sign of lifeAfter staying over a month at the lowest levels of the year, almost 10% down for the year, but finally the market has been able to recover. But the fundamental data that has been pushing this move up is quite bizarre. Perhaps we are out of the water and I hope so as some other positions in Mexican stocks will be affected by the performance of this recovery. So far the recent move looks promising as it has clearly broken above the 25MA which will now serve as support as price attempts to climb into a higher deviation. Successfully breaking above the 200MA would place the index out of trouble for the coming time. Let's hope for the best and If the USA rides into euphoria, perhaps Mexico can ride along as well. Additional to the analysis here, I give a great visual description of what my indicators tell me and how I read them. The same is true for the short term deviation, which helps me see the finer movements of price action.
BMV:ME
by DarkMessiah777
Are we heading into euphoria or a technical reset?Here we can clearly see that the market structure keeps trending up, in very aggressive manners. Many technical resets have been made, and recently we went through one that lasted almost the entire Biden administration. Even though this reset is great for price action, it seems that it is quickly becoming parabolic. If price continues to behave in this manner, then we could be headed into euphoria. It's crazy to think that the yield curve has been inverted for this long. Failure to reset technicals could bring us into a period with great short term yield. This could potentially captivate novice traders to become overconfident. Start paying attention to people around you if we keep on trending upward. Is your common foe suddenly talking about stocks and investments? I personally don't feel that way yet. But I can't deny the excitement people feel of finally reaching new time highs. I'm not saying we are heading into a crash right now. But technicals and fundamentals are beginning to line up for what seems to be extreme optimism with flashing warning signs. I don't feel too confident in this market and would prefer to be buying at lower prices and see price trend up slower. A reset is necessary, or else we will be headed into an unhealthy and very violent uptrend.
SP:SPXLong
by DarkMessiah777
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Price overextension: misconceptions and common mistakesPrice overextension remains a widely misunderstood concept in trading, causing both novice and seasoned traders to make errors in their decision-making. This misinterpretation often leads to placing trades in the wrong direction or, equally detrimental, overlooking profitable opportunities. In essence, price overextension signifies that the market has undergone a rapid and excessive movement in one direction. Such movements are often perceived as unsustainable. Numerous indicators, such as Stochastic, RSI, Bollinger Bands and many other, attempt to identify such "abnormal" price movements so traders could capitalize on them. Despite variations in statistical methods and calculations, their common goal is to detect instances where price went or down too much and is likely to reverse. In this discussion, I will use Relative-Strength-Index (RSI), a popular indicator, to convey my perspective on price overextension. While some traders argue for customization, the elusive question of "how" often remains unanswered. From my experience, there are no universally perfect settings that consistently yield optimal results. I’ll draw my examples from the recent SPY bar chart (February 2024). The first misconception The first misconception is that if price is overextended it is time to immediately start looking for a trade in the opposite direction. The most important phrase here is “start looking”. Many beginners misinterpret this as an invitation to commence trading, leading to the premature initiation of short positions during perceived market "overextension" and vice versa. So, the first and foremost important advice is to never try guessing top/bottom based on one indicator or gut feeling. Simple as it seems I remember many times breaking this rule myself because the temptation was too strong. It rarely ended up well. On the graph, I've highlighted three recent instances where the RSI exceeded 70 (indicating overbought conditions). What stands out is that, following each occurrence, the price surged significantly before consolidation set in, inflicting losses upon short traders. Even experienced traders, who look for confluence of signals, may fall into this trap. In the first two examples, bearish candlestick patterns failed to prevent subsequent price increases. Most likely, those candles were “created” by weak hands traders, who tried to short market, while it was actually controlled by strong buyers. These instances could have been avoided by considering the daily graph, revealing a robust bullish context – price was in an uptrend, one-time-framing up on weekly. There were couple of moments when bears gained short term control (Tuesdays 13th and 20th) but they never could take the previous week low; bulls always confirmed their control. The second advice is to avoid trading against higher level context. While sometimes those trades might work the result is usually mediocre and most of the times you’ll simply lose. If you really wish to trade against context you need to construct a solid dossier of evidence, supporting your trade. The second misconception What is the second misconception? It is that when price overextended it is not time to go with the market. In this scenario, traders refrain from initiating long trades after RSI indicates overbought conditions, potentially causing them to miss profitable opportunities. It might not hurt your account but who likes missing good opportunities? Surprisingly, seizing these trades correctly is not much harder than any other trade. It simply requires prudence and discipline and getting rid-off cognitive biases. For example, in the second example on the graph a trader could win up to 1% if he played off gap-up open after seeing that the new price has found acceptance. Conclusion It is possible to build a profitable strategy that relies on “price overextension” concept. However, it demands more than a cursory examination of a single indicator and adherence to textbook candle patterns. Personally, I reached a point where I entirely abandoned the use of RSI and similar tools because, instead of providing clarity, they seemed to cloud my thinking. Opting for a more effective approach involves keenly observing actual market behavior, which often defies conventional expectations. Study of high-level contexts, understanding key levels, and discerning confluence in price action signals on lower timeframes consistently prove invaluable. This method helps steer clear of common pitfalls and contributes to enhancing overall trading results.
AMEX:SPYEducation
by hermes_trisme