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The Extreme Swing

The extreme swing is a variation of the mega overbought/oversold reading.  It name is derived from the fact that some primary trend reversals are signaled by a swing from such unbelievable emotional exuberance as the bull market reaches its peak, to one of complete despondency and depression, as the market eventually reacts in the opposite direction to what was originally expected.  The same holds true as it swings from a primary bear to a primary bull market.

In order to qualify for an extreme swing, the first swing must represent the strongest move in several years, certainly the strongest since the initial thrust, or climax move, from the previous bear market bottom or bull top.  It appears in a momentum indicator in the form of an incredibly strong move in the direction of the prevailing, or primary trend.

 

 

 Figure 1

 

An extreme reading in the opposite direction then follows this sharp move.  In Figure 1, we see a bull move blow-off as the oscillator reaches a very overbought reading.  This move is subsequently followed by a price decline that pushes the oscillator back down to the opposite extreme. 

 Extreme swings develop because the first swing strongly encourages participants who have been right about the prevailing trend and discourages those who have been wrong.  In the case of a bull market, the final rally also squeezes out all of the remaining shorts, so when the trend reverses, there is virtually no buying activity from speculators covering short positions.  The preceding sharp advance also encouraged buyers who could see there was only one way prices could go, and that was up.  As a result, decisions on the buy side are made recklessly, without thought for the fact that prices may, and usually do, move the other way.  When they do, these individuals have no staying power and are mercilessly flushed out of the market.  Since there are few short sellers able to pick up the pieces, the price drops ferociously. 

 When developing between a bear and bull primary trend (Figure 2), the mood swing is the reverse; from total despondency and depression as the bear market squeezes out the last of the bulls to one of disbelief as the market reverses to the upside.  As market bottoms it’s the shorts who gain confidence from the sharp and persistent down trend.  Even the strongest bulls are forced to capitulate, so in the end, there is no one left to sell.  When the rally phase begins, the shorts are forced to cover and new buying comes in because of the perceived improvement in the fundamentals.  Since there is virtually no one left to sell, prices shoot up and an extreme overbought is registered.

 Needless to say, extreme swings are quite unusual, but when you can spot them, it really pays to follow their lead since a new trend invariably results.

 

Figure 2

 

 

 



   

 


 


The Extreme Swing

The extreme swing is a variation of the mega overbought/oversold reading.  It name is derived from the fact that some primary trend reversals are signaled by a swing from such unbelievable emotional exuberance as the bull market reaches its peak, to one of complete despondency and depression, as the market eventually reacts in the opposite direction to what was originally expected.  The same holds true as it swings from a primary bear to a primary bull market.

In order to qualify for an extreme swing, the first swing must represent the strongest move in several years, certainly the strongest since the initial thrust, or climax move, from the previous bear market bottom or bull top.  It appears in a momentum indicator in the form of an incredibly strong move in the direction of the prevailing, or primary trend.

 

 

 Figure 1

 

An extreme reading in the opposite direction then follows this sharp move.  In Figure 1, we see a bull move blow-off as the oscillator reaches a very overbought reading.  This move is subsequently followed by a price decline that pushes the oscillator back down to the opposite extreme. 

 Extreme swings develop because the first swing strongly encourages participants who have been right about the prevailing trend and discourages those who have been wrong.  In the case of a bull market, the final rally also squeezes out all of the remaining shorts, so when the trend reverses, there is virtually no buying activity from speculators covering short positions.  The preceding sharp advance also encouraged buyers who could see there was only one way prices could go, and that was up.  As a result, decisions on the buy side are made recklessly, without thought for the fact that prices may, and usually do, move the other way.  When they do, these individuals have no staying power and are mercilessly flushed out of the market.  Since there are few short sellers able to pick up the pieces, the price drops ferociously. 

 When developing between a bear and bull primary trend (Figure 2), the mood swing is the reverse; from total despondency and depression as the bear market squeezes out the last of the bulls to one of disbelief as the market reverses to the upside.  As market bottoms it’s the shorts who gain confidence from the sharp and persistent down trend.  Even the strongest bulls are forced to capitulate, so in the end, there is no one left to sell.  When the rally phase begins, the shorts are forced to cover and new buying comes in because of the perceived improvement in the fundamentals.  Since there is virtually no one left to sell, prices shoot up and an extreme overbought is registered.

 Needless to say, extreme swings are quite unusual, but when you can spot them, it really pays to follow their lead since a new trend invariably results.

 

Figure 2

 

 

 

           

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