Page 356 - How to Make Money in Stocks Trilogy

M = Market Direction: How You Can Determine It 231

port area is a previous price level below which investors hope that an index
will not fall.) What you want to know is whether selling picks up dramati-
cally or by just a small amount as the market collapses into new low ground.
If selling picks up dramatically, it represents significant downward pressure
on the market.
After the market has undercut previous lows for a few days, but on only
slightly higher volume, look for either a volume dry-up day or one or two
days of increased volume without the general market index going lower. If
you see this, you may be in a “shakeout” area (when the market pressures
many traders to sell, often at a loss), ready for an upturn after scaring out
weak holders.

Overbought and Oversold: Two Risky Words
The short-term overbought/oversold indicator has an avid following among
some individual technicians and investors. It’s a 10-day moving average of
advances and declines in the market. But be careful. At the start of a new
bull market, the overbought/oversold index can become substantially “over-
bought.” This should not be taken as a sign to sell stocks.
A big problem with indexes that move counter to the trend is that you
always have the question of how bad things can get before everything finally
turns. Many amateurs follow and believe in overbought/oversold indicators.
Something similar can happen in the early stage or first leg of a major
bear market, when the index can become unusually oversold. This is really
telling you that a bear market may be imminent. The market was “oversold”
all the way down during the brutal market implosion of 2000.
I once hired a well-respected professional who relied on such technical
indicators. During the 1969 market break, at the very point when everything
told me the market was getting into serious trouble, and I was aggressively
trying to get several portfolio managers to liquidate stocks and raise large
amounts of cash, he was telling them that it was too late to sell because his
overbought/oversold indicator said that the market was already very over-
sold. You guessed it: the market then split wide open.
Needless to say, I rarely pay attention to overbought/oversold indicators.
What you learn from years of experience is usually more important than the
opinions and theories of experts using their many different favorite indicators.

Other General Market Indicators
Upside/downside volume is a short-term index that relates trading volume in
stocks that close up in price for the day to trading volume in stocks that close
down. This index, plotted as a 10-week moving average, may show diver-
gence at some intermediate turning points in the market. For example, after