Market Indicators: The Best-Kept Secret to More Effective Trading and Investing

Chapter 5. Too Far, Too Fast

	Whenever you find yourself on the side of the majority, it's time to pause and reflect.
	--—MARK TWAIN

Stocks don't travel in a straight line. A bull market has pullbacks as owners doubt value and sell, which sometimes begets more selling. By the same token, bear markets have short-term rallies. This chapter will look at a variety of measurements that suggest how "oversold" or "overbought" a market has become. A long-term investor might use these to better model buying and selling points. A shorter-term trader can catch a good portion of the rides up and back down, as investor spirits rise and fall.

Percent of Stocks above the 10-, 40-, 50- and 200-Day Moving Averages

Good decisions and good luck increase a firm's value over time, while poor decisions and bad luck do the opposite. Absent an extraordinary event, however, a company's true value doesn't change much from day to day. But its stock price may, underlining the sometimes-capricious nature of stock prices, and the importance of individual research and understanding. Much of the time, the market is approximately right. Sometimes, however, it gets carried away.

Many professionals view the 200-day moving average as a good proxy for the markets' longer-term view of a company's valuation. The Nasdaq Composite Index contains nearly three thousand stocks, representing a wide variety of companies. In a flat, range-bound market, about half these companies should trade above their 200-day moving averages. ...