What Does Overbought or Oversold Mean in Forex Market?

by Vahid | Forex Market Analysis and Signals | Monday, December 24th, 2007

Today was a very slow day due to the holidays. It was not good for the intraday trading and also for taking any new position for swing trading because as I have already explained, the market direction is unclear right after the holidays and you have to wait a little for the market to start moving on a regular pattern.

So tonight I don’t have a lot of things to say and will check the currency pairs and see how much they moved and if there is any significant change in their situation or not. This will help us to take the right position after the holidays. I am sure you have spent a lot of money for the holidays and so you need to recover it

Tip of the day:

What does over-bought or over-sold mean and why the market becomes exhausted and changes the direction after it has been going up or down for a while?

As you know, supply and demand determine the price. When there are more buyers than sellers, the price goes up and vise versa. When most of the traders buy, the market becomes Bullish and the price goes up but the appetite of the Bulls has a limitation and after a while they start selling and collecting their profit. But they don’t do this all at the same time. Some Bulls keep their positions longer and many others close their position when they make a small amount of profit.

So the price goes up for a while and then you see some Bearish candles. It means some of the Bulls has started to sell and collect their profits. But the price keeps on going up and this cycle will be repeated a few times and sometimes few times. Finally the big Bulls decide to sell and collect their profit and it is the time that the price starts going down significantly. It is exactly the time that Bulls are exhausted or the currency is over-bought. This story is also true when the Bears are stronger than Bulls.

This is what that makes Elliot Waves. I will talk about Elliot Waves more.

1. British Pound against US Dollar (GBP-USD)

As per my prediction on December 22, today GBP-USD kept on going down but as the market was so slow, it just moved about 83 pips. GBP-USD is a very volatile currency pair and its movements are a lot bigger. GBP-USD has been able to break a very strong support on December 19 and so you have to be careful about going long because usually after breaking a strong support, the price can go much lower.

Of course as you know, sometimes a broken support acts as a resistance and the price goes up to test the resistance but in most cases it is unsuccessful and will go down again. This is all what we think but the market never tells us what it will do in future. So we never act according to our thoughts. We act according to what we analyze and see. If the market shows any clear signal, we act, if it doesn’t show any clear signal we wait.

The last thing about this currency pair by now: Can you see the Elliot Waves?

2. US Dollar against Japanese Yen (USD-JPY)

The resistance I talked about it on December 22 is broken now.

What will happen in these cases? When a resistance becomes broken, two things can happen: #1. The price keep on going up #2. The price just goes up a little and then goes down and tests the resistance that acts as a support after breakage.

As USD-JPY has been going up for about one month and now has succeeded to break a very strong resistance, it is exhausted and I think it will go down for a few days and may test the broken resistance (which works as the support now). The shape of a few last candle sticks admits that Bulls are exhausted and are collecting their profit and closing their long position. This will cause the price to go down.

So what should do? If you already have a short position, just move your stop loss under the 61.80% Fibonacci level which is at about 113.50. If you don’t have any position currently, it is good chance to make some profit by going short but the risk is high because it is possible that the price goes up. Also please consider that we have Crude Inventories announcement on Wednesday at 10:30am EST. If I were you I would wait and see what will happen.

Let’s take a look at the weekly chart.

The weekly chart says that Bulls are very strong BUT there are two things that we have to consider: #1. The last candle stick is right under the Bollinger middle band and around the 32.20% Fibonacci level. What does that mean? It means the price will go up and down in this area for a while. So what I predicted according to the daily chart is correct. The price should start going down for the next a few days and it is possible that it bounces up again after that.

3. Euro against US Dollar (EUR-USD)

The daily chart is in an indecision situation currently. It seems Bulls and Bears are both strong.

Let’s see what the weekly chart says:

The weekly chart shows that Bears are stronger in general. On the other hand GBP-USD also says the the price will go down and Bears are stronger. So what I suggest is waiting for a few days and if it starts going down, we can go short.

4. US Dollar against Swiss Franc (USD-CHF)

As I explained on December 22, USD-CHF moves against EUR-USD and currently the daily chart admits this:

As you see it is going up slowly. The weekly chart also says up. Swing traders has to wait for more confirmation if they don’t have any open position right now.

5. US Dollar against Canadian Dollar (USD-CAD)

In the December 22 report, I suggested you to go short and if you had done that, you would have made about 80 pips so far. Bears are still strong in the daily and weekly charts.

6. Australian Dollar against US Dollar (AUS-USD)

In the December 22 report I mentioned that it will go up for a very short time and then will go down. You can see the two Bullish arrows I placed on the December 22 chart. Now I see that it acted exactly according to that prediction and went up for 40 pips and now it is testing the Bollinger middle band and has gone down a little. AUS-USD is a slow currency pair and its movements are not that big but 40 pips is really a good movement specially now that we are in holidays.

Now, the last candle stick on the weekly chart is right under the Bollinger middle band and so close to the 50% Fibonacci level. It means it is time for the price to go down a little and as you see on the daily chart, it has already started to go down.

7. New Zealand Dollar against US Dollar (NZD-USD)

This one also went up for about 40 pips but now it is testing the Bollinger middle band and has gone down a little. When the price is around the Bollinger middle band you have to be careful because sometime it goes up and down several times and then chooses a direction. If you went long on December 22, just collect your profit and wait. The last candle stick on the daily chart is a Bearish candle stick and as it is right under the Bollinger middle band, it is highly possible that the price goes down. It is an opportunity to make something about 40 pips again but the risk is a little high. Those who like to take risk can go short and place their stop loss a few pips above the Bollinger middle band.

The previous candle stick on the weekly chart shows that Bears are so strong. It should go down at least for a few days.

8. Euro against Swiss Franc (EUR-CHF)

Wow! This one has moved up nicely. It has succeeded to break the 61.80% Fibonacci level. Going up has a big possibility.

9. British Pound against Japanese Yen (GBP-JPY)

The weekly chart is forming head and shoulders and is at the end of the second shoulder. Going down has the highest probability.

The daily chart tells you what is going on inside the last shoulder that is forming in the weekly chart:

I still think that it will go up and tests the resistance once again but before that we have to wait and see if it tests the support or not. Maybe it is forming a double bottom.

10. Euro against Japanese Yen (EUR-JPY)

As I mentioned on December 22, it is going up gently. It went up for about 80 pips but went down after that.

11. British Pound against Canadian Dollar (GBP-CAD)

I don’t see any significant change in this currency pair since I checked it on December 22.

I expect it goes down because the weekly chart is also strongly Bearish.

12. Euro against Canadian Dollar (EUR-CAD)

This one is strongly Bearish too.

13. Euro against British Pound (EUR-GBP)

The daily chart shows that the resistance is broken:

The broken resistance was a very strong resistance that could not be broken on 12 May and 27 May, 2003. It is still a little early to know this resistance as a broken resistance and we’d better to wait a little more.

14. British Pound against Australian Dollar (GBP-AUS)

It went down for about 170 pips. It seems it will keep on going down.

15. Euro against Australian Dollar (EUR-AUS)

This one also went down for 80 pips. Hope you took my December 22 advice and went short.

16. British Pound against Swiss Franc (GBP-CHF)

It went down for about 90 pips.

Fundamentals:

The market is closed tomorrow because of the Christmas holiday. On Wednesday at 10:30am the Crude Inventories will be announced. Be careful not to be trapped in the intraday movements.

Further Reading:

20 Comments:
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Comment by Jerry Kinney

2007-12-25 00:17:06

Great articles. Iam a newbie, so I appreciate how you explain in simple terms what you are doing and why.