Friday, March 19, 2010

Mild Pullbacks From Strongly Overbought Conditions

I’ve shown many times before how strong selloffs rarely end when the 1st day of the bounce is meek. Most of the time to get a strong multi-day move off a low, you need a convincing day-1 bounce. Tonight I decided to flip this concept on its head a little bit and examine what happens after a small pullback day during a strong upmove. For this study I used the 2-day RSI. The 2-day RSI is a very sensitive indicator so it would take a very small decline from a very overbought position in order for it to remain above 90 on a down day. This is what happened on Thursday and what I examined below.

There appears to be a fairly strong upside tendency over the last 13 years based on these results. The edge pretty much plays itself out within the first two days though. Looking further out in time did not showing significant results.


bhh said...

C 90, today >80 - x days out
C 90, today >70 - x days out
C 90, today >60 - x days out
C 90, today >50 - x days out
C 90, today >40 - x days out
Would paint a pretty good picture about how the magnitude of a pullback from overbought plays out over the next few days.

bhh said...

that's weird, it didn't like my syntax and truncated it. Basically today's close less than yesterday's close, yesterday's RSI above 90 and today's greater than 80,70,60, etc.