Question:
Every now and then people mention caution in a market because of an overbought or oversold condition. I’ve never used this as another tool but have noticed that you have also referenced this indicator now and then. Which overbought/oversold indicator do you use and how do you use it?
My Response:
Honestly I dont use anything but price, volume and support/resistance levels when gauging the health of the market. I like to keep it as simple as possible. If you remember, I sent out an email to premium members at the end of July warning of an overbought condition. I was basing this just on previous resistance levels and the magnitude of the run (which nearly mirrored the length of the previous run from April to June – although the stochastics, which measures overbought/oversold would have confirmed this as well). Investing can be complicated enough without having to track several different indicators. My feeling as that indicators such as stochastics (to determine overbought/oversold conditions), MACD (to signal a change in trend), OBV, etc.is just another way of looking at the core components that make up a stock move (price and volume) and how it relates to its movement in the past.
That being said, these indicators can provide another visual picture of whats going and can confirm what you see in the chart. If interested in learning more about the most common indicators used by technical analysts there are some great free tutorials around from Stockcharts.com and Clearstation.com
http://stockcharts.com/education/IndicatorAnalysis/index.html
http://clearstation.etrade.com/education/reading_graphs.shtml
http://clearstation.etrade.com/education/reading_graphs.shtml