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And knowing this helps how?

I have attached a chart below that I grabbed off the web from a finance site. This chart comes courtesy of The Chart Store and it combines two of my least favourite implied TA concepts – the notion of overbought/oversold and the prediction that this implies.

I agree that crowds fatigue, this is simply a function of natural group dynamics. A simple example is next time you are sitting in an audience that is clapping you will notice that at first the clapping is discordant and lacks rhythm and after a very short period if time the clapping begins to synchronize.  The clapping then ebbs and flows, it is occasionally reinvigorated but eventually everyone tires and buggers off. This is a natural dynamic of groups and can be thought of as a metaphor for trends, at first they are halting and hesitating but eventually they find a stability that enables them to last often for very long periods.

However, at no point during this cycle can you predict when the trend is going to end and by definition you cannot predict how far it will go. So the notion of overbought implies a form of prediction – if you know by how much a trend is overbought then you will know when it is going to end. Look carefully at the chart I have attached, price can spend and awfully long time in what could be called an overbought state.













It would be a long time to be in pain if you had foolishly shorted the market based upon your presumption that the market had overcooked itself and had to reverse.


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