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Trade with caution / strategy. DJIA in overbought region (based on stochastic oscillator) since 3rd week of Dec 2009 till now.

Courtesy of StockCharts.com

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Courtesy of StockCharts.com

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Appended below is a ~ 7 mins explanation on Stochastic Oscillator, enjoy:

- Compares an financial instrument’s closing price to its price range over a period of time, with the premise that in rising market stocks will close near their highs, while in a falling market they will close near their lows – to keep moving towards higher high in an uptrend and lower lows in a downtrend.

*   Three different types of Stockastic Oscillator – Fast, Slow and Full

*   Slow Stockastic Oscillator is used most frequently

*   Stochastic Oscillator:

*   %K and %D

*   %K rising ==> momentum of market is increasing and vice-versa

*   %D is 5 simple moving average of %K

*   Range between 0 – 100 (banded oscillator, upper end range marked by 80 and lower end range marked by 20.

*   Trade Signals: 1. Overbought and Oversold. 2. Crossovers 3. Divergence

Key Points: 

*  Like other indicators, the stochastic oscillator would also have false signal from time to time.

*   Important to use in conjunction with other indicators to get a better overall picture

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