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How can Momentum be Both Oversold and Bearish?

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Momentum oscillators can move to extremes and remain at extremes during strong trends. In a strong uptrend, a momentum oscillator can become overbought and remain overbought. This is when momentum is overbought, but still bullish. In a strong downtrend, a momentum oscillator can become oversold and remain oversold. This is when momentum is oversold, but still bearish. It may sound like an oxymoron, but a chart example should help clear up this point.

The accompanying chart shows the 20+ Year Treasury ETF (TLT) with the Commodity Channel Index (CCI). This momentum oscillator is considered overbought when above +100 and oversold when below -100. TLT experienced two strong trends over the last eight months. The strong uptrend pushed CCI above +100 twice (red dotted lines). The orange areas show when CCI moved above +100 and stayed above +100. Notice that prices continued higher as long as CCI remained above +100. This is why CCI was both overbought and bullish.

090703tlt
(SharpCharts users can click on this chart to see the settings)

After this strong uptrend, a strong downtrend developed from January to June. CCI moved below -100 in late January and stayed below -100 for a few weeks (yellow area). Notice that the ETF continued lower as long as CCI remained below -100. There was another extended stay below -100 from late April until early May. Again, TLT moved lower as long as CCI remained below -100. This was a case when CCI was both oversold and bearish.

Arthur Hill
About the author: , CMT, is a Senior Technical Analyst at StockCharts.com. He has written articles for numerous financial publications including Barrons and Stocks & Commodities magazine. Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed technician. In addition to his CMT designation, Arthur holds an MBA from the Cass Business School at City University in London. Learn More
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