In strongly trending markets overbought/oversold oscillators like the Stochastic oscillator are not very helpful. But in markets that are seeing some volatility or are trading sideways they can be very useful in a technical analysis.
The S&P 500 index has been moving jumping around its 200 day moving average for the last four days. At this early point in Tuesday’s session it recaptured and is holding above the average.
The stochastic oscillator is at a level that, in the past, has prefaced sharp reversal bounces. Those reversals have taken several days and even weeks to evolve.
If the S&P were to break sharply below its 200 day average and continue lower, than the stochastic oscillator would remain oversold. Momentum oscillators can stay in overbought or oversold conditions for a very long time.
But if we see a bounce off the 200 day moving average look to the stochastic oscillator, volume, and the Chaikin money flow indicator for information as to the move’s sustainability.