Overbought Oversold Ratio
This indicator is used to determine if the market is either overbought or oversold. When the chart moves above 1.40 the market is said to be in overbought territory. This means that all the buyers are already in and there are not a lot of buyers around to push the market up further. The demand decreases so the price of stocks should decrease. When the market is overbought it may be indicative of an intermediate top. If there is a lot of momentum to the upside the top may not come for several more days. I have even seen the
top come a few weeks later if the Specialist Short Ratio (in the Weekly Barometer
) is below 40%, which is considered extremely bullish.
When the chart moves below .70 the market is said to be oversold. This means that the selling activity in the market has just about been absorbed. The market should move higher. Over the past few years the .70 benchmark has proven to be a very accurate in predicting market rallies. It is important to look at the other indicators to make sure that they concur or that the indicator makes a turn to the upside before committing funds to the long side.
Another benchmark that should be looked at in this area of the daily stock market barometer is the .90 range. This is the dotted line at the bottom of the screen. When the Overbought/Oversold Ratio falls below .90 and proceeds back up through .90 it is a fairly good indicator to purchase stock market index calls.
This indicator is calculated by taking an accumulation of the daily advances in the New York Stock Composite for 10 days and dividing the ten day total of daily declines. This is repeated for the amount of history that you are tracking and the figures are then plotted on the screen.
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