In either case, it can make sense to compare the %K and %D lines. However, be warned that if a stock is strongly trending in a particular direction over a long period, the values could stay in overbought or oversold territory for an extended period. When a stock is trading in a particular range, and the oscillator’s values move into overbought or oversold areas, look for a price reversal. The latter is a three-day moving average of the former. The former is the value for the current trading session. On a chart, the stochastic oscillator consists of two lines, the %K (fast line, in red in the chart above) and %D (slow line, in blue). Readings under 25 indicate that the stock is “oversold” and possibly overextended on the downside. Values can range from 0 to 100, with a reading over 75 indicating that the stock may be “overbought” and possibly overextended on the upside. Basically, this is a momentum indicator that compares a stock’s current price to its highs and lows over a given period. Here’s where we bring in the stochastic oscillator. You might narrow the list further by looking for stocks that trade at least 200,000 shares a day.
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