What happens when markets get over-bought? The answer is supposed to be: They go down. Yet most of us have been around long enough to know that things don’t always work out as they’re “supposed to.” So maybe it’s not much of a surprise to learn that over-bought markets, such as the US stock market today, frequently continue to go up, rather than drop.
That’s the unexpected result of some analysis I recently completed on the Dow Industrials over the last 5 years, based on the weekly RSI, a momentum indicator often used to gauge when markets are over-bought or over-sold. The idea with this chart is that as the RSI (the top line on the chart below) approaches 70, it enters the over-bought zone and “should” therefore have trouble going any higher. So how’s that theory worked out? The short answer is: Not so hot.
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