The Overbought/Oversold function determines the momentum of the market by calculating a moving average of the difference between the advancing and declining issues.
The Overbought/Oversold indicator is calculated by subtracting the number of declining issues from the number of advancing issues and taking a 10-period moving average of this value. Because it uses a moving average the value at the beginning of a data series is not defined until the tenth sample. Readings >200 are considered bearish and readings < -200 are generally considered bullish. When the indicator falls below +200 a sell signal is generated and when the OB/OS indicator rises above -200 a buy signal is generated.
The Overbought/Oversold indicator is useful for determining the momentum of the market. A value above zero is generated when more stocks are advancing (increasing in price) than declining. A value below zero is generated when more stocks are decreasing in price. Broad market indicators are best used for trading against broad market indices through options, futures, and mutual funds. They can also be used to increase the effectiveness of more specific signals by adding confirmation or warning of upcoming trends.