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Probabilities Favor a Rally - Lessons from the NYMO

Posted on February 23, 2009 by Adam

Good morning traders,

As I’m assessing the market this morning, I keep noticing how deeply oversold we are. As we sit at the lows, not doing much, we are approaching relative lows in the NYSE McClellan Oscillator.

Like all oscillators, the McClellan Oscillators moves from overbought to oversold. The more deeply oversold we get, the more likely a rally becomes, and a sharp one at that. That doesn’t mean we can’t head lower, it just means that the probabilities favor a short term swing to the upside. I’m still bearish in the long term, but I’m a bit skewed in my trading towards a bullish sentiment.

I got long some IPI this morning, given the strength I’ve noticed in agriculture.

Check out this graph of the McClellan, and notice how it’s approached extreme lows, and how it’s responded to those lows in the past.

Notice how low the NYSE McClellan Oscillator has gotten, and look at how it has reacted to these extreme lows in the past. That's why I'm skewed towards the long side here.

Also, make sure to sign up for the Point and Figure Tutorial tonight. It should be very informative!

Happy Trading