Last week I mentioned some useful indicators to target the end of a move. The FTSE 100 overbought / oversold condition can be measured with three indicators: 34-day BTI, 13-day BTI and Top 20 Differential. These are my proprietary indicators and they are all reliable.
Difference between the three indicators
Basically 13-day BTI and Top 20 Differential warn of a short term move lasting a few days. The 34-day BTI warns of a move lasting longer (more than 2 weeks). The other difference is that the 34-day BTI is not considered a timing indicator because the expected move may not start immediately. Indeed, there have been some occasions where it took one or two months before the move started. People who use the 34-day BTI for timing will use a wide stop loss, if the expected move does not start immediately you need to give the market room to move. The advantage of being short when this indicator has given a signal is 1) a decline is nearly guaranteed, 2) the profit will be large. As the move will unfold over a long period of time (more than two weeks), normally the profit will be significant if you are on the right side. So you may get into the move a bit early with the 34-day BTI but the reward is huge.
34-day BTI vs FTSE 100
Here is the chart of 34-day BTI since April 2013, with the FTSE 100 as overlay (solid dark line). Each time the 34-day BTI rises above 400 the FTSE 100 becomes overbought and each time a decline follows.
Key dates when 34-day BTI rose above 400
22 May 2013: the decline in the FTSE 100 started immediately, the index lost nearly 11% in a month.
19 November 2013: the decline was already underway, the FTSE lost 4% in nearly a month.
19 May 2014: the decline started ten days later, the FTSE lost 4.5% in two months.
10 February 2015: the decline started two months later and the FTSE lost 17% in four months.
23 October 2015: the decline started immediately, the FTSE lost 14% in less than four months.
21 July 2016: it's been a month since the indicator rose above 400, a significant decline has yet to materialise.
Of course I trade short term so when a decline is underway I will not sit on a trade for months. I will use the other indicators, 13-day BTI and Top 20 Differential, to take profits when these indicators become oversold. For example if I am short based on the 34-day BTI and the 13-day BTI becomes oversold, I will close my short and wait for a bounce before going short again. That was the right approach during the decline from October 2015 to February 2016. There were huge rallies during the decline and going in and out was the right thing to do.
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