Analysis of Stochastic Oscillator

A lot of information can be gathered from the shapes and duration of the market tops and bottoms of the stochastic oscillator indicator.

The amount of time that indices stays overbought or oversold is an important factor when analyzing the strength of the market trends.

Trading Market Tops

Narrow market top that does not reach very high above 80 %

Narrow market tops means that the bulls are weak, and that the trading bears have overpowered the trading bulls very quickly. This means that the trading bears might push the price further down without much resistance from the trading bulls.

Very high, wide market tops

Wide market top mean that the trading bulls are very powerful much more than the trading bears and the ensuing short term trend reversal (retracement), will be very short lived. Retracement on the stochastic oscillator technical indicator will not even reach the oversold areas before the stochastic oscillator technical indicator moves back to the overbought levels.

Trading Market Bottoms

A narrow market bottom that does not reach very deep below 20%

The narrow market bottom means that indices trading bears are weak in their attempt to push the price down, the trading bulls have gained control of the price pretty fast so the price movement upwards will continue for a while. And the upward market trend will continue for a while.

Very wide, deep market bottoms

A wide market bottoms is a sign that the trading bears are very strong and the sellers are in control of the price, therefore any retracement upwards will not stay for long.