Overbought and Oversold Conditions - SPX, GOOG, AAPL & TSLA
So far I have emphasized that a level acquires more relevance for a potential reversal when the price is overbought or oversold, here are some cases:
Overbought Condition 📈
An overbought condition suggests that a rally might be due for a pause or reversal because the price has moved up too far, too fast.
With the Stochastic Oscillator: A security is considered overbought when the oscillator reading goes above 80. On the $SPDR S&P 500 ETF Trust(SPY)$ Daily Chart, the yellow circles (like on July 31st and Sep 1st) highlight where the Stochastic crossed above 80, signaling overbought conditions that preceded a price decline.
With the Relative Strength Index (RSI): A security is considered overbought when the RSI reading goes above 70. The $Alphabet(GOOG)$ $Alphabet(GOOGL)$ Daily Chart shows a red circle where the RSI moved above 70, indicating an overextended move right before the price pulled back. See the confluence with the Stochastic also overbought.
With Bollinger Bands: A price is considered relatively overbought when it touches or moves above the upper Bollinger Band. The $Apple(AAPL)$ Daily Chart shows a period in December 2023 where the price pushed above the upper band, which was followed by a price reversal back toward the middle band.
Oversold Condition 📉
An oversold condition suggests that a price decline may be losing momentum and could be due for a bounce or reversal.
With the Stochastic Oscillator: A security is considered oversold when the oscillator reading drops below 20. On the same SPX Daily Chart above, the green circles (like on Aug 18th and Oct 5th) show the Stochastic curling up below 20.
With the Relative Strength Index (RSI): A security is considered oversold when the RSI reading drops below 30. The Daily $Tesla Motors(TSLA)$ Chart shows the RSI falling into the oversold zone (below 30) on two occasions (Feb 5th and Mar 16th), both of which signaled a price bottom before a bounce.
With Bollinger Bands: A price is considered relatively oversold when it touches or moves below the lower Bollinger Band. The same AAPL Daily Chart above highlights periods in November and March where the price fell below the lower band, signaling an “oversold” state that was followed by a bounce.
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