Last week, I was aggressive in buying. One tip I got was from the following two charts:
The upper one is the Bullish Percent Index for the S&P 500 (BPSPX)…Without going into details, it alternates between 100 (extreme bullish) and 0 (extreme bearish). It is a contrary indicators with 80 or above as overbought and 25 or below as oversold. The market tends to go the other direction when such levels are hit.
Over the past three years, the BPSPX hit 80 just three times. It dipped below 25 also just three times.
Looking at the S&P 500 chart below to see how it behaved following each of those extremely oversold conditions (blue arrows)…
In each case, the stock market rallied over the next several weeks. While there is no guarantee it must happen this way, statistically it is highly correlated, right? For the most recent one, it hit 80 late Jul right about the time when SPX peaked. Last Friday, it hit 25, a great time to load up. Anyone who dared to buy last week, especially Friday, must be really happy of doing so!
But this week's panic buying has made the market in a really stretched position for the short term. I think it is highly likely we will see some decent selloffs next week to alleviate the overbought condition before the market can go up further.
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