Which Indicator Is The Best One For You?

In my market overview on Wednesday I said the one negative for the market was the poor price-and-volume action. Institutional accumulation was not evident and I needed to see that before getting too excited about the long side. I also said that the wildcard was the economy, and that the biggest question mark there was job creation.

Friday took care of both of those issues. A strong employment report led to a follow-through day for the markets.

Through doing my research this weekend, I noticed more stocks nearing the completion of basing formations than I have in a very, very long time. If you haven’t gone through your charts in a while, I would suggest you do so.

One problem many that many traders face is that they concern themselves with market indicators that have nothing to do with their particular style of trading. A current example would be a growth trader who now wants to wait for a pullback to enter the market because of “overbought” conditions. If a follow-through day leads to a short-term “overbought” condition in the market, that should have no impact on a growth investor’s willingness to put money to work.

O’Neil states that the ideal follow-through scenario occurs when the follow-through day occurs four to seven days into the new rally. In many cases, after the market has rallied for four to seven days, then it will be approaching an overbought condition already. Overbought/oversold indicators are useful for strategies that look to take advantage of short-term market overreactions. They are not useful in determining when the market may embark on a new bull run.

There are oodles of indicators out there. At any one time, many of them will be throwing off conflicting signals. Make sure you understand which ones are useful for your particular investing strategy, focus on those, and filter out the rest. If they don’t apply to your style of investing, they are just noise.

Best of luck with your trading,

Rob Hanna

robhanna@rcn.com