Stocks Above Moving Average

I use numerous indicators to figure out whether we are overbought or oversold, but one of the most reliable is also the most basic - percentage of stocks above moving average.

As you can see, we're modestly overbought right now on a short-term time frame and more overbought long-term. When trading, I'd like to see those moving averages down in the 20s and 30s. The same goes for putting money to work for long-term holds as well. The idea is that oversold markets tend to create more opportunities. Overbought markets present more risk. And, at the end of the day, it is all about risk versus reward.

One of the problems I've had so far throughout 2006 is that we haven't dipped into oversold territory since last October. However, I've yet to see any year, even in the big bull markets in the late 90s, where we didn't see oversold conditions sometime. To place bets on the theory that we'll avoid oversold conditions again both in the short and long-term looks like a sucker's bet to me.