20 DMA Custom Indicator Not Yet OverBought

I use an indicator to figure out if the market is overbought or oversold. This simply takes the
number of Nifty stocks above their 20 Day Moving Averages (DMAs) and subtracts from it the
number of stocks below their 20 DMAs. Further, we smoothen it with a 5 day average. This figure
will oscillate from +50 to -50. And typically it gives you a good leading indication of a move.

While the Nifty has zoomed up, we have the indicator not going to absolute extremes (above 35
and below -35 are extremes)
The trading strategy I use is to go long when the indicator goes above 30 and then reverses
below. Yet, this only has a 60-70% chance of success, and you have to use a close stop loss (in
fact, the 2009 election timeframe gave a false short call!). So you have to use it with care and
control losses I use options and the last year or so have generated about 6-7 calls with
reasonable success.
Remember that this move wasnt recognized by the indicator it didnt go to -30 before the
upmove. So while I made money on a short trade from 5400 to about 5280, I didnt get a long
signal at all! Disclosure: Long on specific stocks, not on index.

The current state of the indicator means two things there is distribution (that is, the largest caps
are not moving as much and thus arent chopping through their DMAs) which, in conjunction with
the fact that there is huge accumulation in the trading midcaps, I foresee a bad ending for this
move within two months. In fact the number of stocks above their 20 DMAs is just 42 (and 8
below). Two days ago, the score was 44-6.
The other thing is that we have broken a long trading range and the indicator doesnt seem to
work very well during big breakouts. Its a mean reversion trading strategy and very short term;
and obviously a trend indicator does better during breakouts. So going short now may not even
pay off. Just saying, because this stuff isnt designed to be simple or easy you have to take
calculated risks, and understand these are risks.
Also, this post is purely for education, not investment purposes etc. Dont follow any of this
unless youre willing to lose money in the markets.