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We’re Looking For Oversold Conditions

One of the most classic characteristics of markets that are not trending higher is when momentum is getting oversold. Markets in uptrends don’t get oversold. They get overbought! Think about it: How can an overwhelming amount of buyers possibly be a bad thing?

I understand there are some strategies that wait for oversold conditions in their indicators to trigger buying opportunities and other things like that. That’s cool. But when I am referring to momentum, I am specifically describing a 14-period RSI. For today’s discussion we’ll focus more on 14-day RSI for this specific timeframe. If we were having a longer-term conversation, we would be looking at a 14-week RSI on a chart that goes back decades. Currently, the weekly chart is in a bullish range, so that is not in question. Today we’re focused on the coming months and quarters.

The Relative Strength Index (or RSI) is a momentum Oscillator. All that means is that it ranges from 0 to 100. Oversold conditions are when RSI falls below 30, and over bought conditions are when RSI gets above 70. While other people use different momentum indicators, RSI is the one for me. See Momentum in Allstarcharts EDU. Even if you use other momentum indicators, the one thing I will encourage is to stick to one or 2 at most. Less is more, trust me. Price is the most important thing anyway, so why add additional supplements for the same purpose.

In 2015, one of the reasons I was so bearish was because momentum hit oversold conditions in the S&P500 during the August decline. It became very clear at that point that we needed to sell into strength, not buy into weakness. The trend had clearly changed when prices broke that 2040 support that had been in place since February. Momentum confirmed that. The following January...