Overbought Readings Provide Big Test

A few weeks ago when the overbought/oversold oscillator reached an extreme overbought reading I explained how extreme readings tended not to end moves but rather we tended to see a contra-trend move followed by another move in the direction. Back then I showed how the extreme oversold reading was in October and despite the lower low in the market in November the oscillator made a higher low. The contra-trend move was November's decline.

After the extreme overbought reading in early December I explained how a pullback was what was needed to relieve the overbought level and then we would typically head back up again. As of now the overbought/oversold oscillator appears to be making a lower high, but we'll get to that later. My point here is that the same routine would have to occur in the 30-day moving average indicator should we get an extreme higher high in it in the next few days (i.e. a pullback and then another rally).

The aforementioned oscillator has in fact made a lower high. But it won't be maximum overbought until Friday of this week so it still has some room to make a higher high (I doubt it will, but I'll give it the benefit of the doubt).

So we'll watch for the overbought reading early in the week on the 30-day moving average of the a/d line as well as the overbought reading on the shorter-term oscillator later in the week. Depending on how they look when they reach those overbought extremes could determine how the market will fare as we head further into January. Right now it's about the upcoming overbought readings.

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Know What You Own: Some stocks and exchange-traded funds mentioned recently by Meisler in her "Top Stocks" newsletter include SPDR Gold Shares (GLD - commentary - Cramer's Take), CurrencyShares Euro Trust (FXE - commentary - Cramer's Take), Shanda Interactive (SNDA - commentary - Cramer's Take), Altria (MO - commentary - Cramer's Take), Abercrombie & Fitch (ANF - commentary - Cramer's Take), Under Armour (UA - commentary - Cramer's Take) and CSX (CSX - commentary - Cramer's Take).

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At the time of publication, Meisler had no positions in any stocks mentioned, although holdings can change at any time.

Helene Meisler writes a daily technical analysis column and TheStreet.com Top Stocks. For more information, click here. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback; click here to send her an email.