Friday, January 30, 2009

Unfilled Downside Gaps Coming From Overbought Conditions

The last time the market was moving off a similar overbought condition was January 7th and that day’s bar was very similar to similar to Thursday’s. It included an unfilled gap down from an overbought condition and a selloff of close to 3%. Below is a study that appeared in the January 8th Subscriber Letter that looked at similar situations. Note the study does not include the January 7th instance which led to further selling.

I also found when doing this study that the stronger selloffs led to stronger further declines on average.

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