How to Spot Exhaustion up to 80% of the Time

Trade without a plan, and you plan to fail.

All too often, we buy and sell as part of the herd. We never question if the trend is likely to stay intact, or fade and die, costing us our invested dollars. But if you pay attention to what a chart is telling you for example, the better you stand to do. 

For example, four of the best indicators to use, include:

Williams % Range (W%R)

When Williams moves to or above its 80-line, it’s an indication the asset is oversold. When it moves to or above the 20-line, it’s overbought.

Relative Strength (RSI)

When RSI moves to or above the 70-line, we have an overbought condition. When RSI moves to or below the 30-line, we have an oversold condition.

Money Flow (MFI)

Money flow is another oscillator that uses price and volume to measure the strength of buying and selling pressure. When MFI moves to or above its 80-line, we have an overbought condition. When MFI moves to or below its 20-line, we have an oversold situation.

Bollinger Bands (2,20)

The idea behind Bollinger Bands is simple. When a stock – or index – touches the lower band, the situation can be considered oversold. When a stock touches the upper band, it can be considered overbought. Here’s an easier way to think about Bollinger Bands.

When you stretch a rubber band, you can only stretch is so far.

The same idea applies to stocks, too, especially after a bout of extreme fear or greed. If we stretch the stock too far to the upper Bollinger Band, the more overbought it is. If we stretch the stock too far to the lower Bollinger Band the more oversold it is.

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Let’s apply all four to Disney (DIS) for example.

Notice what happens after an incredible run higher between May 2016 and February 2017.  For one, the moment, DIS challenged its upper Bollinger Band, we could begin making an argument for exhaustion at top of trend.

It also told us the bulls had become far too bullish.

Two, relative strength (RSI) was above the70-line, telling us DIS was overbought.

Three, money flow (MFI) began to peak at its 80-line, telling us the stock was overbought.  And finally, Williams’ %R (W%R) topped out above its 20-line.

Each time each indicator aligned and agreed with the other indicators, we could tell with up to 80% accuracy when and where a stock was likely to pivot from exhaustion.

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