Chapter 13 OSCILLATORS. Oscillators are used to identify overbought and oversold market conditions. The oscillator is plotted on the bottom of the price chart and fluctuates within a horizontal band. When the oscillator line reaches the upper limit of the band, a market is said to be overbought and vulnerable to a short-term setback. | Chapter 13 OSCILLATORS Oscillators are used to identify overbought and oversold market conditions. The oscillator is plotted on the bottom of the price chart and fluctuates within a horizontal band. When the oscillator line reaches the upper limit of the band a market is said to be overbought and vulnerable to a short-term the line is at the bottom of the range the market is oversold and probably due for a rally. The oscillator helps to measure market extremes and tells the chartist when a market advance or decline has become overextended. Relative Strength Index RSI This is one of the most popular oscillators used by technical RSI scale is plotted from 0 to 100 with horizontal lines drawn at the 70 and 30 RSI reading above 70 is considered to be RSI reading below 30 is considered to be oversold. The most popular time periods for the RSI are 9 and 14 days See Figure 13-1 . Stochastics This oscillator is also plotted on a scale from 0 to 100. However the upper and lower lines marking the overbought Charting Made Easy 47 Figure 13-1. RSI OSCILLATOR Dow Jones Industrial Average _ 10 10 . - Al 2d A 9-day RSI oscillator applied to the Dow Industries. RSI readings over 70 often coincide with short-term pullbacks. Readings below 30 often identify market bottoms. Charts powered by MetaStock and oversold levels are at the 80 and 20 levels. In other words readings above 80 are overbought while readings below 20 are oversold. One added feature of stochastics is that there are two oscillator lines instead of one. The slower line is usually a 3-day moving average of the faster line . Trading signals are given when the two lines buy signal is given when the faster line crosses above the slower line from below sell signal is given when the faster line crosses beneath the slower line from above 80. The time period used by most chart analysts is fourteen days See .
