Timing entry and exit points by identifying overbought/oversold conditions.

	Tom Ventresca MarketEdge .com
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There are several technical indicators included in the Market Edge (www.marketedge.com) 'Second Opinion' report which can be used to pinpoint entry and exit points. These vary from oscillators, which identify overbought and oversold conditions to moving average crosses, which identify short-term trend reversals. The most popular oscillators are the stochastic indicator and Wilder's RSI while the best moving average combination is called Moving Average Convergence Divergence (MACD).

The stochastic oscillator is very good at identifying overbought and oversold conditions. It compares where a security's price closed relative to its trading range over x-time periods. Values range from 0 to 100. Readings over 80 signal overbought conditions (bearish), while readings below 20 are regarded as an oversold situation (bullish).

There are two stochastic oscillators, Slow %K and Fast %K. Both are constructed by comparing a stock’s closing price to its trading range over the five previous days. Slow %K is then smoothed with a three-day simple moving average while Fast %K does not. As might be expected, Fast %K is much more erratic than Slow %K and, therefore, not as reliable.

The graph located below is a weekly chart of IBM with the Slow %K stochastic oscillator plotted at the bottom. Both overbought (over 80) and oversold (under 20) areas are labeled. Note that the week ending 3/16/00, Slow %K dipped below 20 when IBM closed at 95. This represented a very oversold situation and an excellent time to purchase IBM shares. IBM proceeded to rally over the next six weeks, topping out at 118 as Slow %K soared to over 80, signaling another overbought condition.

The Stochastic oscillators work best when the market is in a trading range but should not be the basis for a trading system. Rather, they should be used to spot entry and exit points within the framework of a trading approach with an intermediate-term time frame. For example, let's assume a moving average system is used to signal when a stock is in an up trend. Using this approach, a position is initiated and would be held until the moving average system signals that the trend has reversed. By using the stochastic oscillator to spot overbought/oversold conditions, the stock could be traded several times over the same time period, capturing several profitable trades versus holding the position throughout.

Both the Slow %K and Fast %K oscillators are located on the Market Edge "Second Opinion" reports (www.marketedge.com). In addition, the Market Edge site contains several screening capabilities, which search for stocks that are either overbought or oversold based on the status of the stochastic oscillator.

Tom Ventresca has been Computrade’s Director of Research since its inception in 1991. Prior to founding Computrade, Tom spent 12 years in the securities industry holding several positions including broker, sales manager, bond trader and market technician.
1947: Born-Pittsburgh, Pa.
1965-1969: Pennsylvania State University, BA degree.
1970-1978: Builder
1978-1990: Securities industry. Firms included First Southeastern, E.G. Francis, First Southeastern, Smith Barney and Oppenheimer.
1990-Present: Computrade Systems, Inc. Co-founder and Director of Research. Computrade is the developer of Market Edge, a comprehensive, computerized research web site, which is accessed by individuals, brokers and institutions throughout the world. As Director of Research, Tom writes Market Edge’s ‘Market Letter’ and ‘On The Edge’ plus the Dr. Market Edge series. Both the Market Letter and On The Edge provide in-depth market analysis based on three market timing models that he developed. Tom also has recently finished a new book, ‘Trade Like A Pro’ which is a systematic, disciplined approach to the stock market. Based on technical analysis, this book addresses five topics that he believes are critical to having success in the market. These subjects include market timing, stock selection, timing entry and exit points, protecting positions and money management.