Return from Holiday.

I had taken time off for almost three weeks. I am glad to be back at my trading desk. This also gives me the opportunity to re-start blogging!
My grateful thanks to all friends who conveyed their best wishes on my son’s marriage.

Overbought markets can remain overbought for long periods of time.
The first issue is: what defines overbought? The easiest definition is to use a bounded momentum indicator which has overbought and oversold levels. Examples of such indicators include the RSI, Stochastics & CCI. When the indicator value goes above the predetermined overbought value, the security is considered overbought.
What I mentioned above is the theory. In actual practice, markets in trading ranges can be considered overbought and oversold. Markets in trends are just that – markets in trend. If a market is in an uptrend then it is supposed to go up. Where is the question of being overbought?
Once the trader decides that a market is in an uptrend, overbought levels in an indicator confirm the strength of the trend. if the indicator becomes overbought and prices keep on moving up, the message is: this is a strong trend.

Summary:

The concept of overbought and oversold markets is valid in trading ranges. Once a market is in a trend, overbought indicator readings is actually a confirmation of the trend.