We can say that something (i.e. individual asset, entire market, technical indicator) is overbought when its value rises so high that (according to the technical analysis) it’s unlikely to advance even further. Generally, an overbought market is a sign that a downward correction is likely to occur. Traders use indicators such as Relative Strength Index (RSI), Stochastic Oscillator, Money Flow Index to identify overbought conditions. For example, one can view a given market as “overbought” if the RSI indicator for this market is above 70.
Is Gold Overbought?
It’s impossible to tell without knowing the situation in which gold is at the moment when this question is asked. One of the things that we focus on in our daily Gold & Silver Trading Alerts is detecting whether gold is overbought, waiting for bearish signals in order to profit from the following move down. Two of our in-house developed indicators aim to flash sell signals in the overbought territory: SP Short Term Gold Stock Indicator and the SP Junior Long Term Indicator.
Do Overbought Conditions Always Imply Tops?
Unfortunately, it doesn’t always work, at least not without taking additional factors into account. In fact, it is a very subjective method of technical analysis. A market that is overbought could be in an uptrend, which means, that more often than not it will continue higher. However, overbought conditions accompanied by some other confirmed sell signals may lead to profitable short trades or long trade exits. Overall, paying attention to the status of the market (whether it’s overbought or not) is very useful, but there are many other factors that need to be considered before placing a trade.