Overbought / Oversold

Tomas DeMark defined two overbought / oversold conditions:

• Extremal overbought / oversold condition occurs when the oscillator is for more than 5 bars in the overbought / oversold area.
• Moderate overbought / oversold condition occurs when the oscillator is in the overbought / oversold area for less than 5 bars.

If the indicator exits the moderate overbought / oversold area, then reversal may occur.

Whereas it exits the moderate overbought / oversold area after it has been in the extremal overbought / oversold area, this does not generally mean trend reversal. As a general rule, before the reversal, the indicator must penetrate this area again and, fixing the moderate overbought (oversold) conditions, exit the area. Only after this may trend reversal occur.