How can Momentum be Both Oversold and Bearish?

(By Arthur Hill)

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.

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.