When the Big Wigs say it is a BUBBLE - we should all listen

Ken Griffin and Ray Dalio along with some of the prominent hedge fund managers have been saying loudly that this is a massive bubble and now we are seeing how the AI bubble earnings is not showing up anywhere in the numbers other than the numbers for the AI labs OpenAI, Anthropic and others - there has been no productivity boom.. AI use is wide spread, but the lofty productivity gains are not materializing as much as the hype. And we have always said - when the hype ends - the money spigot will stop - even though the companies are still selling - the valuations of these stocks is at major extremes - which we have highlighted on our x.com account (@trucharts) and here in our blog. margin debt at all time highs; market valuations matching and exceeding the previous bubbles - but yet all the asses on CNBS keep hyping the tech stocks. I have lived through these bubbles and all these exponential moves always end in disaster and the ordinary guy is left holding the bag. This story has played out before - many times and every time - the dialog - 'This time is different" - will be mentioned, hundreds of times.. But you have to see through the hype and learn how to see this in the charts and what is happening actually. I use AI - it is a great tool but I do not need to use it 24 hours a day. I use it for doing research on things I am interested in, make it write code for me and it is a good TOOL - there is ZERO intelligence - even Satya Nadella said it in his interview.  Here are some charts showing the bubble in all its glory - (charts courtesy of  MacroMicro)

The first chart shows the margin balance relative to the money in circulation - compare today versus the 2000 bubble.

This chart shows the US total Market cap divided by the widely measure M2 money supply - above the 1999-2000 bubble..

This chart shows the Buffet indicator - highest ever!!! US market cap divided by GDP

The CEO NVIDIA (who has a bunch of 'YES MEN' ventured into making CPUs for general market - guess what he is making billions in the GPUs - but wanted to make CPUs - for which we already know the TAM (Total addressable market) by looking at INTC and AMD - there is history of the PC/laptop TAM for over 40+ years and yet he wants to make CPUs - low margin business and the stupidity of it is truly mind boggling!!! But when there is too much money - stupidity follows.

This bubble bursting is starting (started) and this will impact the Bay Area housing market and all along the West coast - which is a major bubble in itself - this happened exactly in 1999-2000. No difference - homes selling for 10M over asking!! That is a sign of a bubble..

So learn from this, and learn to read charts and read - make money but also don't get caught up in the hype - like they say on Wall Street - Bulls Make Money, Bears Make Money, Pigs get slaughtered..

Best of luck trading - I tell you charts have been my go to savior and it has truly saved me and also made money. 3 of our personal accounts were up over 25%+YTD - all from chart reading and writing covered calls. Check out our site and videos (I will be putting out some soon) and will be publishing articles here and on the site - we cannot be beat at the feature set we offer and I use it everyday to watch my stocks and charts and use it find opportunities to make money in.

Ignorance does not pay!!

Best of luck trading and investing - use trucharts.com to 

TRADE SMARTER AND INVEST BETTER!

How to Read Trend Lines and Support and Resistance Like a Technical Analyst

Long before anyone had a laptop, let alone a phone, traders were drawing lines across hand plotted price charts to figure out where a stock was likely to find buyers or sellers. The idea got its modern, widely taught treatment from John Murphy, whose book "Technical Analysis of the Financial Markets" has introduced several generations of traders to the basic toolkit of chart reading. Trend lines, along with support and resistance, sit right at the center of that toolkit, and they remain one of the first things most people learn when they start looking at charts seriously.

The appeal is simple. A trend line is just a straight line connecting a series of price points, usually swing lows in an uptrend or swing highs in a downtrend, that shows the general direction and pace of a move. Support is a price area where a stock has tended to stop falling and turn back up. Resistance is the mirror image, a price area where a stock has tended to stop rising and turn back down. None of this requires a formula, a subscription, or a computer science degree. It requires a chart and a willingness to look at it honestly.

That last part, honesty, is really the whole game, and it is why this concept is still genuinely useful more than three decades after Murphy first wrote about it. A trend line is only as good as the swing points it is drawn from, and a huge amount of bad trading comes from traders bending a line to fit what they want to see rather than what the chart is actually showing. This week we will build a real, split adjusted trend line on NVDA stock, watch it get tested, watch it actually break, and then watch it get reclaimed, all using real weekly price data rather than a tidy textbook drawing.

What a Trend Line Actually Is, and How to Read One

Start with the raw ingredients: a swing low is a week (or day, depending on your timeframe) where the price dropped and then turned back up, so that the low of that week sits below the lows of the weeks on either side of it. A swing high is the opposite, a week where the high sits above the highs around it. These turning points are the chart's own record of where buyers or sellers actually stepped in.

To draw a rising support trend line, a technical analyst looks for at least two swing lows that are both higher than the one before, then connects them with a straight line and extends that line forward into the future. The logic is that if buyers have twice shown up around a rising price level, they may show up there again. A falling resistance trend line works the same way in reverse, connecting a series of lower swing highs.

Two touches is the minimum to draw a line. Three or more touches, especially if they are spread out over weeks or months rather than clustered together, is what gives a trend line real credibility. A line drawn through two points that happen to line up by coincidence is not much more than a guess; a line that price has respected three or four separate times, across different market conditions, is telling you something about how that particular stock is being traded.

The other habit worth building early is distinguishing a wick from a close. Weekly candlestick charts show four prices for the week: the open, the close, and the high and low, usually drawn as a thin line (the "wick" or "shadow") extending above and below a thicker body. Price can dip below a trend line on a wick, meaning it traded there briefly during the week, without actually breaking the trend. What matters more to most technical analysts is where the price closed. A single week that closes back above a trend line after dipping below it on a wick is usually read as the trend line holding, or being "tested" successfully. Multiple weeks in a row closing below the line is a much stronger signal that the trend line has genuinely broken, sometimes called a "breakdown."

A Real Trend Line on NVDA, Start to Finish

Here is the whole sequence, built entirely from real weekly OHLCV data pulled this week and adjusted for NVDA's stock splits so the chart is not distorted by the mechanical price drop a split causes. The first swing low used to anchor the line sits in the week of September 5, 2025, at a low of $164.07. The second sits in the week of November 28, 2025, at a low of $169.55, higher than the first. Two points, both higher than the last, is enough to draw the line and project it forward.

The first real test came in the week of February 6, 2026. The weekly low that week was $171.03, which actually dipped slightly below where the projected trend line sat at that point ($174.12), but the week closed at $185.41, well above the line. By the "close, not wick" standard most technical analysts use, that is a trend line holding, not breaking. This is exactly the kind of moment that separates a careful trend line reader from someone who panics at the first lower wick they see.

Then, in late March 2026, something more serious happened. Over the three weeks of March 20, March 27, and April 2, 2026, NVDA closed at $172.70, $167.52, and $177.39, all below where the trend line sat during those weeks (roughly $176.86 to $177.77). Three consecutive closes below the line is a real break by almost any reasonable definition, not a wick, not a one week fluke. If you were following this trend line in real time, this is the point at which you would reasonably conclude the rising support had failed.

Except it was not over. The very next week, April 10, 2026, NVDA closed at $188.63, decisively back above the trend line, which by then sat near $178.23. The breakdown had failed to follow through, and the stock went on to make a new higher low in the week of July 2, 2026, at $189.80, still above the trend line and consistent with the original uptrend. As of the most recent close in this data set, October 23, 2026, NVDA closed at $210.96, while the same trend line, extended all the way out, sits near $191. More than a year after it was first drawn from two swing lows, the line is still technically intact, even though price broke below it on a closing basis for a few weeks along the way.

This is a genuinely useful, if slightly messy, real world lesson. Murphy's own writing on trend lines is clear that a line is a tool for organizing your thinking about a trend, not a guarantee, and that both false tests and false breaks happen regularly. The NVDA example above has both: a false test in February (the wick below, close above), and what looked like a real break in March and April that ultimately reversed. Reading a trend line well means being able to sit with that kind of ambiguity instead of forcing a clean story onto the data.

A Closer Look, With a Hypothetical Trade Example

Chart 2: A zoomed in view of the same NVDA trend line from October 2025 through July 2026, isolating the February test, the March to April break, and the April reclaim, with a hypothetical entry, stop, and target overlaid for illustration.

Zooming in on the test, break, and reclaim makes the sequence easier to see week by week. It also lets us walk through a HYPOTHETICAL way a trend line follower might have approached this setup. This is not a recommendation and not a claim about what any real trader did; it is purely an illustration of how the concept connects to a trading decision.

HYPOTHETICAL example: suppose a trader waited for confirmation rather than acting on the first dip below the line, and bought NVDA on the close of April 10, 2026 at $188.63, the week the stock reclaimed the trend line after the three week break. A reasonable, structurally based stop loss would sit below the broken low from that sequence, around $163, giving the trade room to breathe without ignoring the possibility that the breakdown was real after all. A first target might be set near the next visible resistance zone from recent chart history, around $230. Again, this entire paragraph is a hypothetical illustration built after the fact to show how the pieces fit together, not a performance claim or investment advice.

Notice what this example does and does not do. It does not try to catch the exact bottom of the dip in March, which is usually a low probability bet. It waits for the close to confirm that buyers had stepped back in, which costs some upside but avoids acting on noise. That tradeoff, giving up the first few dollars of a move in exchange for more confidence that the move is real, is one of the central judgment calls in trend line trading.

A Checklist Before You Act on a Trend Line

• Does the line actually connect at least two, and ideally three or more, real swing lows or swing highs, rather than being drawn to pass near one or two candles that do not clearly stand out as turning points?
• Are you judging a "break" by the closing price over multiple periods, not by a single wick poking through the line for a few hours or one week?
• Does the trend line agree with what the stock is doing on a higher timeframe (for example, does a weekly support line sit in roughly the same place as a monthly one), or is it only visible if you zoom in tightly?
• Have you checked whether volume increased on the move that tested or broke the line, since a break on unusually heavy volume generally carries more weight than one on a quiet week?
• Do you already know, before you act, exactly where you would be wrong, meaning a specific stop loss level, rather than deciding that after the trade is already open?

Limits and Risks

Trend lines are a useful organizing tool, not a precise predictive instrument, and it is worth being direct about that. Because they are drawn by a human (or by software following rules a human set), two careful chart readers can draw slightly different lines on the exact same chart and reach different conclusions about whether it has broken. The NVDA example above shows a trend line that was "broken" for a few weeks before resuming its climb; a trader who treated that break as final and exited or shorted the stock would have been faked out, at least for this particular stretch of 2026.

False breaks and false tests happen in both directions, and there is no setting or rule that eliminates them entirely. Trend lines also tend to work better in trending markets than in choppy, sideways ones, where price can cross back and forth over a line repeatedly without either side ever really winning. For these reasons, most experienced chart readers treat a trend line as one input among several, combining it with other forms of confirmation such as volume, momentum indicators, or the broader market environment, and they manage risk with a predefined stop rather than assuming any single line will hold. No pattern or indicator in technical analysis works every time, and trend lines are no exception.

Try it yourself on TruCharts. The interactive stock charts at trucharts.com let you draw and test your own trend lines directly on real price history, including NVDA. Pull up the same stretch of 2025 and 2026 covered in this article, add the line tool, and see for yourself where the test, the break, and the reclaim sit, before scrolling forward to see what actually happened next. It is a much better way to build the habit of reading closes instead of wicks than staring at a static image.

Subscribe to TruCharts to get next week's chart reading lesson, plus full access to the charting, screener, and back-testing tools, delivered straight to your inbox.

Coming up next week: we will look at reading momentum rather than price directly, covering how to spot bullish and bearish divergence using RSI and MACD, an idea most closely associated with Martin Pring's book "Technical Analysis Explained." Read next week's article once it is live.

This article is for educational and informational purposes only and does not constitute financial or investment advice. Any hypothetical trade examples described above are clearly labeled as hypothetical and are not a record of actual trades or guaranteed outcomes. Past price behavior, including the NVDA example used here, does not predict future results. Please consult a licensed financial advisor before making any investment decisions. 

The Interesting Fibonacci Retracement Levels for stock trading: Finding Where a Pullback Might Stop

 

Fibonacci Retracement Levels: Finding Where a Pullback Might Stop

Every stock that trends higher eventually pulls back for a bit before (hopefully) continuing on its way. The hard part isn't noticing the pullback. It's figuring out where it might stop. Buy too early and the stock could keep falling. Wait too long and you might miss the bounce entirely.

Fibonacci retracement levels are one of the most widely used tools for tackling that problem. They're a set of horizontal lines, drawn between a recent high and low on a chart, that mark the price levels where a pullback has historically had a good chance of pausing or reversing. You'll see them referenced constantly in trading commentary, chart annotations, and technical analysis write-ups, so understanding the basic idea is genuinely useful even if you never draw one yourself.

In this article, we'll explain where these levels come from, walk through a simple worked example, and talk honestly about where the tool falls short, because it absolutely does, and knowing its limits matters as much as knowing how to use it.

What Fibonacci Retracement Levels Are

The name comes from the Fibonacci sequence, a famous string of numbers (1, 1, 2, 3, 5, 8, 13, 21, and so on, where each number is the sum of the two before it) first popularized in mathematics centuries ago. Dividing numbers in that sequence by each other produces a handful of recurring ratios, most notably 23.6%, 38.2%, 50%, 61.8%, and 78.6%. Traders noticed decades ago that prices often retrace (pull back) by roughly these percentages before resuming their prior direction, and the pattern stuck around in technical analysis ever since.

You don't need to calculate any of this by hand. A charting tool lets you click once on a recent swing low and once on a recent swing high (or vice versa for a downtrend), and it automatically draws horizontal lines across those key percentage levels between the two points. The logic in plain language is: "if this stock just rallied from $50 to $100, how far back down might it drift before buyers step back in?" The 38.2% level would sit at $80.90, the 50% level at $75, and the 61.8% level at $69.10, each one a place where traders watch for the pullback to slow down or stop.

The 50% level isn't technically part of the Fibonacci sequence at all, but it's included on virtually every retracement tool because round-number halfway points tend to act as psychological support in their own right. The 61.8% level, often called the "golden ratio," is generally considered the most significant of the group. A pullback that blows through it is often read as a sign the prior trend may be in real trouble, not just taking a breather.

A Worked Example: Hypothetical ABC Corp

Let's say shares of a hypothetical company, ABC Corp, rally from $40 to $60 over a couple of months on strong demand for its products. That's the "swing low" and "swing high" we'd anchor our retracement tool to. After the run-up, the stock starts drifting lower as early buyers take profits.

Using the $40 to $60 range, the key retracement levels would fall at:

23.6%: $55.28
38.2%: $52.36
50%: $50.00
61.8%: $47.64
78.6%: $44.28

Suppose ABC Corp's pullback stalls right around $52, finds buyers for a few sessions, and then turns back upward. A trader watching the chart would note that the stock bounced close to the 38.2% level and treat that as a sign the broader uptrend might still be intact. If instead the stock kept sliding and only found support near $47 to $48, that would line up with the 61.8% level, a deeper, more worrying pullback, but still technically within the bounds of a normal correction rather than a trend reversal. If it had kept falling straight through $44 (the 78.6% level) without pausing at any of these levels, that would be a stronger signal the original uptrend had broken down entirely.

Notice that none of this is a prediction. The levels are areas worth watching more closely, not guaranteed floors. Price can, and often does, blow right through all of them.

Here are a couple of charts from our site for the same stock on two different chart options - the first one is on our classic chart it gets plotted automatically and one for the interactive chart where you can draw these using the tools available on this page. I rarely ever use this.

Classic Chart for stock ACN:

Interactive chart tab (Stock is ACN):

The Limits and Risks of Fibonacci Retracement

Fibonacci retracement is popular, but it's worth being clear-eyed about why it works when it works, and when it doesn't.

First, there's a reasonable argument that these levels are at least partly self-fulfilling. Because so many traders watch the same 38.2%, 50%, and 61.8% lines, enough people place buy or sell orders near them that the levels can become support or resistance simply by popular belief, not because of any deeper mathematical truth about markets. That's not necessarily a reason to ignore the tool, but it's a reason not to treat it as a law of nature.

Second, retracement levels are highly subjective in practice. Two traders looking at the same chart can pick slightly different swing highs and lows, which shifts every level and can produce noticeably different conclusions. There's no single "correct" way to draw the lines, which makes the tool easier to use in hindsight than in real time.

Third, and most importantly, a retracement level is a place to pay attention, not a guaranteed turning point. Stocks frequently blow through every Fibonacci level without pausing, especially during strong trends, broad market sell-offs, or after unexpected news. Treating a 61.8% retracement as a sure-fire buy signal, on its own, is a good way to catch a falling stock with no support underneath it at all.

For these reasons, most experienced chart readers use Fibonacci levels as one input among several, often paired with volume, moving averages, or candlestick patterns at the same price area, rather than as a standalone trading signal.

See it on a real chart with TruCharts' stock screener

Reading about retracement levels is one thing; seeing which stocks are actually sitting near one right now is another. The TruCharts stock screener lets you filter the entire market down to stocks currently pulling back toward a key technical level, so instead of scanning charts one at a time you can see today's candidates for a Fibonacci-style setup in a single list.

Subscribe to TruCharts to save your screens and get a head start on next week's setups.

Coming up next in this series: we'll look at the Average Directional Index (ADX), an indicator that helps answer a different question entirely: not where a pullback might stop, but whether the trend underneath it has any real strength to begin with.

This article is for educational purposes only and does not constitute financial or investment advice. The ABC Corp example above is entirely hypothetical and is used only to illustrate how Fibonacci retracement levels are calculated. Always do your own research and consult a licensed financial advisor before making investment decisions.

 

On-Balance Volume (OBV): How Volume Confirms Whether a Stock Trend Is Real

Most new investors watch a stock's price chart and stop there. But price alone can be misleading: a stock can drift higher on a handful of quiet trades, or it can surge on a wave of heavy buying from thousands of investors. Those two moves look identical on a simple price chart, yet they mean very different things about how much conviction is really behind the move.

That's the gap On-Balance Volume (OBV) is built to fill. OBV is a technical indicator that turns daily trading volume (the number of shares that changed hands) into a single running line, so you can see at a glance whether the crowd is actually piling into a stock or whether a price move is happening on thin, unconvincing participation.

It's one of the oldest volume-based tools in technical analysis, and it remains popular precisely because it's simple to understand and quick to read. Once you know how it's built, you'll start glancing at it almost automatically whenever you check a chart.

What Is On-Balance Volume and How Is It Calculated?

On-Balance Volume was introduced by analyst Joseph Granville in his 1963 book Granville's New Key to Stock Market Profits, built on the idea that "volume precedes price" — that is, shifts in trading activity often show up before a stock's price fully reflects them.

The calculation itself is simple addition and subtraction, with no complicated formula to memorize:

• If today's closing price is higher than yesterday's close, add today's entire volume to a running total.
• If today's closing price is lower than yesterday's close, subtract today's entire volume from the running total.
• If the closing price is unchanged, the running total stays the same.

That running total is the OBV line, plotted underneath the price chart. The actual number OBV lands on doesn't mean much on its own — what matters is its direction and whether that direction agrees with the direction of price. OBV is a confirmation tool, not a standalone price target or valuation measure.

Reading OBV: Confirmation vs. Divergence

There are two patterns worth knowing, and both come from comparing the slope of the OBV line to the slope of the price line.

Confirmation happens when price and OBV move in the same direction. If a stock is making higher highs and OBV is also making higher highs, that tells you rising volume is backing the rally — more shares are being bought as the price climbs, which is generally viewed as a healthier, more sustainable trend.

Divergence happens when price and OBV disagree. If a stock pushes to a new price high but OBV fails to reach a new high alongside it, that can be a warning sign: the move is happening on comparatively weak volume, which some technical analysts interpret as distribution (existing holders quietly selling into the rally) rather than genuine new buying demand. The same idea works in reverse during a downtrend — if price keeps falling but OBV stops making new lows, it can hint that selling pressure is drying up.

A Worked Example: Hypothetical "ABC Corp"

Let's walk through five trading days for a hypothetical stock, ABC Corp, starting with an OBV of 0.

Notice that ABC Corp's price made a new high on Day 5 ($53.40, above the prior high of $52.10), and OBV also pushed to a new high (+3,100,000, above the prior peak of +1,900,000). That's confirmation: the new high in price is accompanied by heavy, consistent volume on the up days, which supports the idea that the uptrend has real demand behind it.

Now imagine an alternate version of Day 5 where ABC Corp still closes at $53.40, a new price high, but on volume of only 150,000 shares — far lighter than the volume that drove the earlier up days. OBV would rise only slightly, failing to clear its Day 3 peak by much, if at all. That mismatch — new price high, weak OBV move — is the divergence pattern worth paying attention to, since it suggests fewer shares are needed to push the price up, which can mean the rally is running out of broad participation.

Day Close Volume Price Change OBV
1 $50.00 — — 0
2 $51.20 800,000 Up +800,000
3 $52.10 1,100,000 Up +1,900,000
4 $51.80 400,000 Down +1,500,000
5 $53.40 1,600,000 Up +3,100,000

Limits and Risks to Keep in Mind

OBV is a useful lens, but it isn't a crystal ball, and no indicator — volume-based or otherwise — guarantees future results.

First, OBV only uses the closing price's direction for each day; it doesn't know how big that price move was. A stock up $0.01 on heavy volume and a stock up $5.00 on heavy volume add the same volume figure to OBV, which can occasionally overstate or understate the significance of a move.

Second, the absolute OBV number is arbitrary and depends entirely on where your chart's data starts — two charting platforms showing the same stock over different date ranges will show different OBV values. Only the shape and trend of the line matter, never the number itself.

Third, divergences can persist for a long time before anything happens, or resolve without a reversal at all. Treating a single divergence as a reliable sell signal, on its own, can lead to exiting a winning trend too early.

Finally, OBV tends to work best on stocks with consistent, meaningful trading volume. On thinly traded or highly illiquid stocks, volume swings can be erratic and produce a noisy, less reliable OBV line. As with most technical tools, OBV is generally more useful as one piece of a broader analysis — alongside price action, trend, and other indicators — than as a signal to act on by itself.

Limited-Time Launch Offer: Ends October 31, 2026

For a limited time, lock in Trucharts Standard for just $12/month or Premium for $20/month (billed annually), Premium normally lists at $468/year. You'll get full access to interactive charts, the stock and crypto screeners, backtesting, earnings and financials, dividend data, the market heatmap, and more, all in one subscription instead of paying for separate tools. Every new account also starts with a 14-day free trial.

Start your free trial and lock in the launch price before it ends on October 31.

Here is a chart showing OBV with other indicators - see if you see accumulation or distribution. And can you spot technical divergences!

See OBV in action on real charts

Reading about OBV is one thing — watching it move alongside real price history is another. With TruCharts' interactive stock charts, you can overlay On-Balance Volume (and other indicators) directly on a stock's price history to see exactly where confirmation and divergence have shown up in the past, on any stock you're researching.

Want tools like this delivered straight to your inbox along with the rest of our weekly series? Subscribe here to get new articles as soon as they're published.

Coming up next week: we'll look at Fibonacci Retracement Levels, a tool traders use to estimate where a pullback within a larger trend might find support or resistance.

This article is for educational purposes only and does not constitute financial or investment advice. The hypothetical example above (ABC Corp) uses illustrative, made-up figures and does not represent any real security. Always do your own research and consult a licensed financial advisor before making investment decisions.

The Stochastic Oscillator Explained - An amazing indicator

 

The Stochastic Oscillator Explained: Timing Reversals With Momentum

Most new investors learn to read a price chart before they learn to read what's happening underneath it. A stock can look like it's "due" for a bounce or "overheated" and due for a pullback, but gut feelings aren't a strategy. The stochastic oscillator is one of the oldest and most widely used tools for turning that gut feeling into something measurable: a simple 0-to-100 reading of how a stock's current price compares to its recent trading range.

It won't tell you the future, but it will tell you when a stock has moved far and fast enough that a short-term reversal becomes more likely. That's exactly the kind of signal traders use to time entries and exits rather than just guessing.

In this article, we'll break down what the stochastic oscillator measures, how it's built, and how to read it using a simple hypothetical example, plus the limitations every beginner should know before leaning on it.

Limited-Time Launch Offer: Ends October 31, 2026

For a limited time, lock in Trucharts.com Standard for just $12/month or Premium for $20/month (billed annually), Premium normally lists at $468/year. You'll get full access to interactive charts, the stock, options strategy screeners and crypto screeners, back-testing, earnings and financials, dividend data, the market heatmap, and more, all in one subscription instead of paying for separate tools. Every new account also starts with a 14-day free trial.

Start your free trial and lock in the launch price before it ends on October 31.

I invite you to check out all the new features we have added - trust me you will not find any site as comprehensive as ours..

What Is the Stochastic Oscillator?

The stochastic oscillator is a momentum indicator (a tool that measures the speed and strength of a price move, rather than the price itself). It was developed by George Lane in the late 1950s on a simple observation: as an uptrend matures, prices tend to close nearer to the top of their recent range, and as a downtrend matures, prices tend to close nearer to the bottom of their recent range. When that stops happening, when a stock stalls well short of a new high even though price is still rising, it can be an early clue that momentum is fading.

The indicator plots on a scale from 0 to 100, displayed in its own panel below the price chart. Readings above 80 are generally considered overbought (the stock has been closing near the top of its recent range, and may be due to cool off), while readings below 20 are considered oversold (the stock has been closing near the bottom of its recent range, and may be due to bounce). "Overbought" and "oversold" don't mean a stock is about to crash or rocket. They simply describe how stretched the recent move has been relative to its own trading range.

How It's Calculated (In Plain Language)

You don't need to do this math by hand (any charting platform will plot it for you), but understanding the intuition helps you trust what you're looking at.

The core calculation, called %K, compares today's closing price to the highest and lowest prices over a recent lookback period (14 days is the traditional default). Specifically, it asks: "Where did today's close fall, as a percentage, between the lowest low and the highest high of the last 14 days?" If a stock closed right at its 14-day high, %K reads close to 100. If it closed right at its 14-day low, %K reads close to 0. If it closed exactly in the middle of that range, %K reads 50.

Because that raw number can be jumpy day to day, most charts smooth it slightly into what's called %D, essentially a short moving average of %K. The two lines are plotted together, and the interaction between them is where the real signals come from: when the faster %K line crosses above the slower %D line while both are down in oversold territory, that's often read as a potential bullish turning point. When %K crosses below %D up in overbought territory, that's often read as a potential bearish turning point.

A Worked Example: ABC Corp (Hypothetical)

Let's walk through a simplified, illustrative example using a hypothetical stock, ABC Corp (not a real company, just numbers to show the mechanics).

Suppose ABC Corp spends three weeks sliding from $64 down to $48, a steady downtrend. As it approaches $48, the stochastic oscillator's %K line has dropped below 20, reflecting that each recent close has been sitting near the bottom of its 14-day range. For a few more sessions, ABC keeps drifting lower, but %K stops making new lows along with it, flattening out around 15 even as price edges down to $47.50. That gap between price still falling and the oscillator failing to confirm it is called bullish divergence, and it's one of the more closely watched stochastic signals.

A few sessions later, ABC closes at $49, and the %K line crosses back above the %D line while both are still below 20. A trader watching this indicator might treat that crossover, combined with the earlier divergence, as a signal that selling pressure is exhausted and a short-term bounce is more likely than not. That doesn't guarantee ABC rallies from here; it simply flags a moment where the odds, based on this one indicator, have shifted.

Here is a chart showing the stochastics in action on a chart: Study it carefully with the other indicators we have highlighted earlier - you will see magic.. Try it, just think about how these work together. We offer unlimited indicators on our site.  

The Limits and Risks of the Stochastic Oscillator

No indicator is a crystal ball, and the stochastic oscillator has well-known weaknesses that every beginner should keep in mind:

It can stay "overbought" or "oversold" for a long time during strong trends. In a powerful uptrend, a stock can hang out above 80 for weeks, repeatedly "signaling" a pullback that doesn't meaningfully arrive while the price keeps climbing. Selling purely because a stock is overbought can mean exiting a winning trend far too early.

It generates false signals, especially in choppy, range-bound markets. Crossovers can flip back and forth rapidly when a stock isn't trending in either direction, producing buy and sell signals in quick succession that whipsaw a trader in and out at a loss.

It's a lagging-ish, range-based tool, not a prediction. The oscillator describes where price has recently been relative to its own range. It doesn't know about tomorrow's earnings report, a surprise news headline, or a broader market selloff that can override any technical signal entirely.

For these reasons, most experienced traders treat the stochastic oscillator as one input among several (often paired with trend-confirmation tools, support and resistance levels, or volume) rather than a standalone buy-or-sell trigger.

See It in Action: TruCharts Market Heatmap

Before you dig into any one stock's stochastic reading, it helps to know where the broader market stands. TruCharts' market heatmap gives you an at-a-glance view of which sectors are currently strong and which are weak, so you can spot where momentum (and potential oversold bounces or overbought pullbacks) may be building before you drill down into individual names.

Subscribe to TruCharts to get full access to the heatmap, interactive charts, and the rest of our research tools.

Coming Up Next

Next week, we'll look at volume and On-Balance Volume (OBV), a way to check whether the price moves you're seeing, including the kind of stochastic signals covered here, are backed by real buying and selling conviction or just thin, low-volume noise. If you want to revisit today's topic later, you can find it at /blog/stochastic-oscillator-timing-reversals-with-momentum.

This article is for educational purposes only and does not constitute financial or investment advice. "ABC Corp" is a hypothetical example used solely to illustrate how the stochastic oscillator is read; it does not represent any real company or security. No indicator, including the stochastic oscillator, guarantees future results. Please consult a licensed financial advisor before making investment decisions.

Stop Paying for Six Subscriptions: Trade Smarter, Invest Better - Trade without emotion!

Most serious investors end up with a stack: one site for charts, another for screening, another for dividends, another for options, and something else for backtesting and signals. Each one is "only" $25 to $60 a month. Together they run about $2,500 a year. The revamped TruCharts puts all of it in one tab for about the price of one of those tools, and at today's offer, for less than any of them.

LAUNCH OFFER · ENDS OCTOBER 31

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~$2,490a year for the typical six-tool stack

$468a year for TruCharts Premium at list price

10×cheaper at the launch price of $240 a year, through Oct 31

What the subscription stack really costs

Here is what you would pay if you bought each capability from a well-known specialist. We used each company's own published price (or a dated review where the company does not publish one) and the cheapest plan that covers the job.

What you need	Popular tool	Their price	Per year
Charts, multi-chart layouts, alerts	TradingView Plus	$29.95/mo billed annually	$359
Stock screener with alerts	Finviz Elite	$299.50/yr	$300
Fundamentals, ratings, earnings research	Seeking Alpha Premium	$299/yr	$299
Dividend safety scores and income tracking	Simply Safe Dividends	$468/yr	$468
Strategy backtesting and automated trading	TrendSpider Standard	from $59/mo	$708
Total for the stack			≈ $2,464
TruCharts Premium (all of the above in one place)			$468

Prices checked October 8, 2026 from each provider's pricing page; Seeking Alpha from a July 2026 published review. Competitor plans differ in depth and data (several offer real-time data and features TruCharts does not), so this compares the cost of covering each need, not identical products. At list price, Premium is about 5× cheaper than the stack. During the launch offer (through October 31, 2026) Premium is $20/mo billed annually ($240 a year) and Standard is $12/mo.

Everything you get, feature by feature

1. Nightly scans and TC buy/sell signals ONLY ON TRUCHARTS

Every night after the close, TruCharts runs every US listing through 65 scans: MACD crossovers, new highs, RSI turns, candlestick patterns and trend changes. On top of that sit our own strategies: TC Fast Trade for swings, TC Positional for longer holds and TC Premium, our most selective. Each signal is drawn right on the chart, with the move since it fired.

Why it matters: you stop hunting for setups and start your morning with a short list. That is what "trade without emotion" means in practice: a rule fired, you can see it, and you decide.

See tonight's signals →

2. Charts, multi-chart layouts and backtesting

Interactive charts with 100+ indicators, drawing tools and 35+ years of daily history. Put a whole watchlist on one screen with synced multi-chart layouts, a perfect second-monitor view. Before you risk money on a rule, backtest it with entry, exit and stop rules and read the results trade by trade.

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3. Stock and crypto screeners

Filter 13,000+ stocks on fundamentals and technicals together: valuation, margins, growth, dividends, indicators, price and volume. Save a screen and re-run it every morning. The same discipline applies to crypto, with a 1,900+ coin screener for momentum, RSI, volatility, turnover and drawdown, with no second subscription.

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4. A research analyst that reads the numbers for you

Tell it how long you invest for. The fundamental analyst ranks every company in the S&P 500, Nasdaq 100 and Dow on profitability, growth, valuation and risk, then explains each placing in plain English, with the case for and against. Go deeper with 41 years of financial statements and Piotroski F-Score and Altman Z-Score health checks.

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5. Earnings and dividend research

See who reports when, what the market expects and how reliably each company beats. For income investors: yield, dividend growth, payout safety scores, every ex-dividend date and a DRIP income projector. That is the core of a dividend-only service that costs $468 a year by itself.

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6. Your 60-second market check

A market dashboard with breadth and a single Market Pulse score, an S&P 500 heatmap, a market calendar with economic releases, earnings, dividends and splits, and a news feed where every headline is scored positive, negative or neutral and tagged by ticker.

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7. Alerts, AutoTrade and portfolio tracking

Get an email the moment a price, volume, indicator or strategy-signal condition is met. Connect your Tradier brokerage account to trade from the chart and use AutoTrade so signals can place orders for you. Then track every holding with live value, day move and total profit in the free portfolio tracker.

Open your portfolio →

Try every feature free for 14 days, then keep the launch price

Charts, screeners, the heatmap, the research analyst and the portfolio are free forever with an account. Start the trial to unlock every scan, live TC signals, the full options screener, alerts and multi-chart layouts. Cancel anytime.

Standard

$12/mo52% OFF

billed annually, normally $25 · or $15 month to month, normally $29

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$20/mo49% OFF

billed annually, normally $39 · or $25 month to month, normally $49

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What TruCharts is not (yet)

We would rather you choose us with clear eyes:

• Not a real-time terminal. Quotes are delayed and scans run after each US close. If you scalp intraday, keep a real-time feed alongside us.
• Advanced backtesting is coming soon. Today's backtester is built for testing a rule on a symbol, not for portfolio-level optimization.
• No live options flow. The unusual-activity feed is great for ideas, but it is not a tick-by-tick flow service.

For the investor who plans trades before the open, researches what they own and wants signals and options ideas without five logins, TruCharts covers the whole workflow.

Get started in five minutes

1. Start the free trial and open the market dashboard. Read the Market Pulse score and tonight's TC Fast Trade matches.
2. Open one signal on the chart. Look at where it fired and what has happened since, then set an alert on it.
3. Run one options preset on a stock you already own, like weekly covered calls, and see what that position could earn.

By the end of the trial you will know, with your own stocks and your own numbers, whether TruCharts earns its place in your morning.

One tab. One subscription. Every signal.

Replace your stack with TruCharts and keep the difference. The launch price of about half off ends October 31, 2026.

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TruCharts signals, scans, scores and option probabilities are research tools, not recommendations, and nothing in this article is investment advice. Option probabilities come from a lognormal model at each option's implied volatility and are not predictions. Options involve risk and are not suitable for every investor. Past signal performance does not guarantee future results. Competitor prices were taken from public pricing pages on October 8, 2026 and may change; product names belong to their owners.

 

Bollinger Bands: Trading Volatility Squeezes and Breakouts

Every stock goes through quiet stretches and wild stretches. Some weeks a stock barely moves; other weeks it swings several percent a day. Bollinger Bands are a tool built specifically to measure that back-and-forth between calm and chaos, which is why they've become one of the most widely used indicators on any stock chart.

Unlike indicators that only tell you direction, Bollinger Bands tell you something different and arguably just as useful: how stretched a price move has become, and when a stock has gone unusually quiet right before it often gets loud again. That combination, direction plus volatility context is why so many traders keep this indicator turned on by default.

In this guide, we'll break down what Bollinger Bands actually measure, how they're built, what a "squeeze" and a "breakout" mean in practice, and where this tool tends to mislead people who lean on it too heavily.

What Bollinger Bands Are

A Bollinger Band setup is really three lines plotted directly on top of a stock's price chart:

The middle band is simply a moving average of the price most commonly a 20-day simple moving average (SMA). It smooths out the day-to-day noise and shows the general trend over the last 20 trading days.

The upper and lower bands sit above and below that moving average, spaced out by a measure of how much the price has been bouncing around lately (called standard deviation - a statistical way of measuring how far prices are wandering from their average). The standard setting places each band 2 standard deviations away from the middle line.

You don't need to calculate standard deviation by hand to use this, virtually every charting platform, including TruCharts.com, plots all three lines automatically. What matters is the intuition: when a stock is calm and trading in a tight range, the bands squeeze close together. When a stock becomes volatile and starts making big daily swings, the bands flare out wide. The bands are, in effect, a visual volatility gauge wrapped around the price. Here is an example chart with bollinger bands plotted on the stock chart - you can see some obvious moves when the stock prices touch the bands up and down (bands are the red line (bottom) and the light blue line (top) of the price bars:

Reading a Squeeze and a Breakout

Two patterns get the most attention from traders who use Bollinger Bands:

The squeeze. When the upper and lower bands pull in tight around the price, it usually means the stock has entered a period of unusually low volatility, a lot of indecision, with buyers and sellers roughly balanced. Volatility tends to be cyclical: quiet periods are often followed by active ones. A tight squeeze doesn't tell you which direction the stock will eventually move, but it's often treated as a signal that a bigger move may be building.

The breakout. When price pushes outside one of the bands closing above the upper band or below the lower band, some traders read that as a sign of strong momentum in that direction, especially if it happens right after a squeeze. Others treat a touch of the upper band as a sign the stock has become "overextended" and might be due to pull back toward the middle line. Both interpretations exist, which is part of why Bollinger Bands are usually paired with a second indicator rather than used alone.

A Worked Example: Hypothetical ABC Corp

Let's walk through a simplified, entirely hypothetical example using "ABC Corp," a fictional stock, to make this concrete.

Suppose ABC Corp trades in a tight range between $48 and $51 for about six weeks. During that stretch, its Bollinger Bands plotted around a 20-day moving average near $49.50 narrow steadily as daily price swings shrink. A trader watching the chart notices the bands are now tighter than they've been in months: a classic squeeze.

In week seven, ABC Corp reports a product update and the stock jumps, closing at $54 well above the upper band, which had been sitting around $51.80. Trading volume that day is also noticeably higher than average. A trader using Bollinger Bands alongside volume might read this as a genuine breakout: the quiet period resolved into a real move, confirmed by strong participation, rather than a one-day fluke.

Over the following two weeks (still hypothetical), the bands widen further as ABC Corp grinds higher to $58, then the price starts drifting back down toward the middle band near $55 a common pattern where a stock "walks the band" during a strong trend before eventually cooling off. None of these numbers describe a real company; they're illustrative only, to show how the shape of the bands and the price interact.

Limits and Risks to Keep in Mind

Bollinger Bands are a useful lens, not a crystal ball, and it's worth being honest about where they fall short.

A squeeze tells you volatility is low, but it says nothing about direction, the eventual breakout can go either up or down, and betting on direction before it happens is a guess. A touch of the upper band can mean a strong breakout is underway, or it can mean a stock is temporarily overbought and about to reverse; the indicator alone can't tell you which, which is why many traders pair it with momentum tools like RSI or volume analysis. Because the bands are built from a moving average, they react to price after the fact rather than predicting it, so by the time a breakout is obvious on the chart, some of the move may have already happened. And like every technical indicator, Bollinger Bands can give false signals - a stock can briefly poke outside a band and snap right back, especially in choppy, low-volume conditions. No indicator, used by itself, removes the uncertainty of investing.

See Bollinger Bands on a Real Chart

Reading about a squeeze and a breakout is one thing — watching the bands actually tighten and flare out on a live price chart makes the concept click a lot faster. Before you act on a Bollinger Band signal, it's also worth checking whether the stock pays a dividend: steadier, dividend-paying names often show narrower bands and gentler squeezes than high-growth stocks, which can shape how you interpret the signal. You can pull up a stock's dividend history and yield on TruCharts in a couple of clicks.

Subscribe to TruCharts to get full access to interactive charts, screening, and more.

Next week, we'll stay on the theme of timing entries and exits with "The Stochastic Oscillator: Timing Reversals With Momentum", another indicator built to catch turning points, this time using where price closes relative to its recent range. You can find this week's full discussion at /blog/bollinger-bands-trading-volatility-squeezes-and-breakouts.

This article is for educational purposes only and does not constitute financial or investment advice. The "ABC Corp" example above is entirely hypothetical and does not represent any real company or security. Always do your own research and consult a licensed financial advisor before making investment decisions.

Title: AI Is Driving This Market — But Here's What's Hiding Underneath

AI Is Driving the Market, but the Real Story Is What’s Happening Underneath

AI is dominating headlines, earnings calls, and capital spending. You can see it across the entire tech ecosystem—data centers, power, cooling, networking, and semiconductors. Companies are pouring billions into AI infrastructure, and Wall Street is rewarding anything tied to the theme.

But the surface-level excitement hides a very different reality underneath. And if you’re trading this market, you need to understand both sides of the story.

A Narrow Rally: Why Only a Handful of Stocks Are Doing the Heavy Lifting

The AI trade is real, but it’s being carried by an extremely small group of mega-cap names. The top 10 stocks in the S&P 500 now make up about 40% of the entire index—levels we last saw during the dot‑com bubble.

This doesn’t mean a crash is around the corner. Rallies driven by hype can last far longer than anyone expects. But it does mean that index investors are far less diversified than they think.

If your portfolio is built around broad-market ETFs, it’s worth taking a closer look at what you actually own.

Under the Surface, the Market Is Quietly Weakening

While the index hits new highs, many stocks are doing the opposite. Small caps are breaking down. Mid-cap industrials, consumer names, and financials are trending lower. Breadth is deteriorating.

This is classic negative breadth divergence and a warning sign that leadership is becoming fragile. It’s not a reason to panic, but it is a reason to be selective and tighten risk management.

Extreme Valuations Are Showing Up in AI-Adjacent Names

Price-to-sales ratios are flashing red in several popular AI stocks. Revenue is harder to manipulate than earnings, which is why P/S is one of the cleanest valuation signals. See PLTR (P/S of over 60) and ARM (P/S of over 55). But this is what happens during bubble phases. See charts below.

These AI-adjacent names are trading at levels that simply don’t align with any reasonable growth model. That doesn’t mean they fall tomorrow, but it does mean the margin for error is razor thin.

On the other side, some overlooked semiconductor names offer strong cash flow, dividends, and real AI exposure without the hype premium. Sometimes the best opportunities are the ones Wall Street isn’t paying attention to.

One I like is QCOM (there is some downside risk due to their concentration in mobile space) - but buying puts at 10% down would be good protection/hedge. Writing covered calls every week generates decent income.

The Bond Market Is Sending a Warning Signal

The 10-year Treasury yield hovering above 5% is not a small detail. Historically, that level acts as a brake on equity valuations. When risk-free money pays 5%, paying 30x earnings for growth stocks becomes harder to justify.

Right now, equities are ignoring this. But when stocks and bonds diverge this sharply, the bond market usually proves right.

How I’m Trading This Environment

I’m staying engaged, but disciplined. Options and covered calls on existing positions have been effective, specially using weekly contracts that generate income while keeping downside defined.

Technical analysis helps me time entries and exits, and my returns this year are tracking well ahead of the S&P 500.

The key is simple: Know what you own. Know why you own it. And have a plan before volatility hits.

More Tools, More Data, More Edge

I’ll be sharing chart setups, trade ideas, and deeper analysis in this blog on use of our site Trucharts.com, where we have built a full suite of research tools: real-time charts, screeners, earnings analysis, sector heatmaps, and more. Everything you need to make informed decisions without juggling multiple platforms.

Stay sharp. More soon.

Bob Bhatia, Founder - Trucharts.com

This article is for educational purposes only and does not constitute financial or investment advice. Always do your own research or consult a licensed financial advisor before making investment decisions.

SMA vs. EMA: Which Moving Average Should You Use? Works great if you learn it and watch the trends..

SMA vs. EMA: Which Moving Average Should You Use?

Both MACD and RSI, which we covered the last two weeks, are built on top of moving averages. So it's worth stepping back and looking at the building block itself: there isn't just one kind of moving average. The two you'll run into constantly are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA), and the difference between them changes how fast an indicator reacts to new price action.

Neither one is "more correct" than the other as they're built for different jobs, and knowing which is doing which job will make every indicator you've read about in this series make more sense.

What SMA and EMA Actually Are

A Simple Moving Average takes the closing prices over a set number of days say, 20 and averages them, giving every single day equal weight. When a new day's price comes in, the oldest day drops off the calculation and the new one is added, so the average shifts smoothly over time.

An Exponential Moving Average also averages recent prices, but it doesn't treat every day equally it gives more weight to the most recent prices and progressively less weight to older ones. The practical effect: EMA reacts faster to what price is doing right now, while SMA is slower to respond because it's still being pulled by prices from further back in the window.

This is exactly why MACD, which we covered in week two, is built from EMAs rather than SMAs its whole purpose is to catch momentum shifts quickly, and EMAs are more responsive.

You can try these at the site and overlay these 2 types of averages to see the differences. Here is an example chart from our site:

A Concrete Example: Watching Them React Differently

Picture a hypothetical stock, "ABC Corp," trading steadily around $50 for a couple of months, then gapping down to $42 in a single day on disappointing news. Both its 20-day SMA and 20-day EMA had been sitting just under $50 before the gap.

The EMA reacts almost immediately because it weights recent prices heavily, it starts dropping noticeably within a few days of the gap, and price quickly falls below it, an early signal that the trend has shifted. The SMA, by contrast, barely moves at first. It's still averaging in all those steady $50 days from earlier in the window, so it takes much longer often a couple of weeks before it meaningfully reflects the new, lower price level. A trader relying only on the SMA would get the "trend has changed" signal noticeably later than a trader watching the EMA.

Now flip the scenario: imagine ABC Corp instead chops back and forth between $48 and $52 for a month with no real direction. Here the EMA's speed becomes a liability it swings up and down with the noise, generating crossover signals that immediately reverse, while the smoother SMA mostly rides through the chop without whipsawing. Responsiveness cuts both ways: it catches real moves earlier, and false ones more often.

So Which Should You Use?

There's no universal answer, it depends on your time horizon and what you're trying to catch. Short-term traders often favor EMA precisely because catching a move a few days earlier matters more to them than the extra noise. Longer-term investors often favor SMA for exactly the opposite reason: smoothness over speed. The widely watched "200-day moving average," used by many market commentators as a rough bull-market/bear-market dividing line, is traditionally an SMA for this reason it's meant to represent the established trend, not the latest wiggle. Plenty of traders simply use both together: an EMA for early signals, an SMA for context on the more durable trend.

The Limits Either Way

Whichever type you choose, remember that both are lagging by definition they're calculated from past prices, so neither predicts what happens next. The choice of time period (10-day vs. 50-day vs. 200-day) generally matters as much as the SMA-vs-EMA choice itself, and it should match what you're actually trying to measure: a short window for near-term timing, a long window for the broader trend.

Check the Fundamentals Behind the Signal

A moving-average crossover tells you what price is doing it says nothing about whether the underlying business supports that move. Before acting on a crossover, TruCharts' earnings and financials data lets you check a company's actual earnings and revenue trend in the same place you're already looking at the chart.

Benefit: you can quickly sanity-check whether a technical signal lines up with the fundamental picture, instead of trading the chart in isolation.

Subscribe to TruCharts for free to get the rest of this technical analysis series as it publishes.

Coming Up Next

Next week we'll cover Bollinger Bands, which wrap a moving average in a volatility measure a natural next step now that you understand the moving average that sits at the center of them.

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This article is for educational purposes only and does not constitute financial or investment advice. The "ABC Corp" example is hypothetical. Always do your own research or consult a licensed financial advisor before making investment decisions.

 

RSI Explained: How to Spot Overbought and Oversold Stocks

Last week we covered MACD, which measures whether momentum is building or fading by comparing two moving averages. This week's indicator, RSI (Relative Strength Index), answers a related but different question: has this stock's recent move gone too far, too fast?

RSI is one of the most widely quoted indicators in financial media — you'll hear phrases like "the stock is overbought" or "RSI is flashing oversold" constantly. Once you understand what's actually being measured, those phrases stop being jargon and start being useful.

What RSI Actually Is

RSI is a bounded oscillator, meaning it always reads somewhere between 0 and 100, unlike price or MACD, which can drift anywhere. It's calculated by comparing the size of a stock's recent up days to the size of its recent down days, typically over a 14-day lookback period, and scaling that comparison onto the 0-100 range.

You don't need to run the math yourself; every charting platform, including Trucharts, plots it for you. What matters is the intuition: when a stock has been rising sharply with few or shallow down days, RSI climbs toward 100. When it's been falling hard with few relief bounces, RSI drops toward 0. Traditionally, a reading above 70 is labeled "overbought" and a reading below 30 is labeled "oversold" shorthand for "this move has been unusually one-sided lately," not a literal prediction that a reversal is imminent.

A Concrete Example: Overbought and Oversold in Action

Picture a hypothetical stock, "ABC Corp," that rallies for three straight weeks on good news. As the rally accelerates, RSI climbs from the 50s into the 70s and eventually touches 80. Around that point, the stock's advance stalls, it starts trading sideways for a few days even though no new bad news has come out. That stall, arriving right as RSI pushes into overbought territory, is the classic pattern: not a crash, just the rally running out of fresh buyers at an unsustainable pace.

Now picture the opposite: a different hypothetical stock, "DEF Retail Co.," drops sharply after a disappointing sales update. RSI falls from the 40s into the 20s within a couple of weeks. Eventually the selling pressure eases, RSI ticks back above 30, and the stock stabilizes and starts to recover even though nothing news-worthy changed. That's oversold conditions resolving.

As with MACD, there's a more advanced pattern worth knowing about even at this stage: RSI divergence. If a stock keeps making new price highs while RSI makes lower highs each time, that's bearish divergence, a sign the rally is being carried by fewer and fewer buyers even as price keeps climbing. The mirror version, price making lower lows while RSI makes higher lows, is bullish divergence. We'll go deeper on divergence later in this series.

Check out this example of the RSI indicator:

The Limits of RSI

The biggest mistake newer traders make with RSI is treating "overbought" as an automatic sell signal. In a genuinely strong uptrend, RSI can stay pinned above 70 for weeks while the stock keeps climbing selling purely because RSI is "high" would have meant missing much of the move. The same is true in reverse during strong downtrends. RSI measures how stretched a move is, not when it will end, and it works best alongside trend context (is the broader trend up, down, or sideways?) rather than in isolation. That's exactly why this series builds toward combining indicators rather than trading any one of them alone.

Test RSI Signals Before You Trust Them

"Overbought" and "oversold" sound precise, but how often do they actually lead to a turn for a given stock? TruCharts' backtesting tool lets you test a rule like "RSI below 30" against a stock's real price history, so you can see how it actually performed before risking real capital on it.

Benefit: instead of trusting a rule of thumb, you get an actual historical track record for the specific stock and timeframe you care about.

Subscribe to TruCharts for free to save backtests like this one and get the rest of this technical analysis series as it publishes.

Coming Up Next

Next week we'll step back from momentum oscillators and cover the moving averages themselves — specifically SMA vs. EMA — since both MACD and RSI are built on assumptions about how a moving average should smooth price, and it's worth understanding those building blocks directly.

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This article is for educational purposes only and does not constitute financial or investment advice. The "ABC Corp" and "DEF Retail Co." examples are hypothetical. No indicator, including RSI, guarantees future results. Always do your own research or consult a licensed financial advisor before making investment decisions.