The Wyckoff tools of Optimism-Pessimism, Force, and Technometer when combined with price and volume provide a variety of indications that are helpful in determining direction and timing. Some of these are easier to use than others. The Technometer is the Wyckoff tool that tells us when a particular index, or individual coin, has become overbought or oversold. We call this an overbought or oversold condition.
These days, there are many overbought/oversold indicators to choose from. The age of computerization is responsible for all these choices. The Wyckoff SMI Technometer has an advantage over all of them. It considers each day of market action from the standpoint of buying and selling waves (demand and supply). All of the others tend to view the market action from the standpoint of arbitrary time increments and to consider only the net effect of these increments (price only). The Wyckoff SMI Technometer considers all three of the important variables – price, volume and time.
The trader who uses an overbought/oversold indicator as aid in timing positions must realize and accept two very important facts. There are no absolutes. Nothing is perfect. Traders and investors who refuse to accept these facts frequently fall into the trap of trying to use the Technometer by itself and in a mechanical manner. Although this will work much of the time, it will not work all of the time. The times when it does not work can be fatal for the individual who does not integrate the full range of observations and indications.
The underlying concept at work with the Technometer is that the vulnerability to a change in direction increases as the market or coin becomes more overbought or oversold. On the LearnCrypto.io Crypto “Pulse of the Market” Charting Service, the Technometer is displayed as a line chart. Theoretically, a Technometer can read as low as 0 or as high as 100. From a practical standpoint, this will never happen. It usually ranges between 60 and 30. This presents a problem. How overbought is overbought enough? How oversold is oversold enough? Fortunately, these questions can be answered with a high degree of reliability. In a trading range market, overbought is 50, oversold is 38. In a market with an upward bias, overbought might be 52, oversold 40. In a market with a downward bias, overbought might be 48, 36 oversold. Wyckoff SMI monitors these changes on a daily basis and will provide thoughts on appropriate levels.
You can observe overbought/oversold Technometer readings on the following charts.
The Technometer will be most useful if it is used as the ending point or the starting point of an analysis. When used as a starting point, it can be a time saver. If the Technometer of the stocks you are monitoring are not high enough or low enough to consider action, additional analysis is not needed. If the values are high or low enough, a more complete analysis is in order. It should provide two or more confirming indications before any action is taken.
When the Technometer is used as an ending point, its purpose is confirmation. Here, the starting point is the trend and position. Does a primary trading opportunity exist? Is that position compatible with the trend? Is there divergent of inharmonious action? Is there a worthwhile potential? Finally, is the Technometer high enough or low enough to justify immediate action? If the answer to all the questions is yes, a position may be established
We want to clarify the following in closing. The Technometer measures the degree to which the market, or an individual coin is either overbought or oversold. In Wyckoff “speak”, we say an index or coin is in an overbought, oversold or neutral “condition”, relative to its Technometer. This is different from an overbought or oversold “position”. An overbought position means that an index or stock has moved out of its trend channel to the upside. An oversold position means it has moved out of its trend channel to the down side.
These overbought or oversold conditions indicate the related index or coin may be subject to a price reversal. During an advance, an overbought Technometer suggests the rally is ending and the trader should be prepared for a reaction. An oversold condition during a reaction suggest the down move is ending and a rally may lie ahead.
The more overbought or oversold the condition, the higher the probability that there will be a significant change in direction.
While, by itself, the Technometer can provide valuable market information, it is even more powerful when used together with the associated vertical line chart.
If the bottom of a reaction is accompanied by a Technometer reading that is more oversold than the previous low, but the price holds above the previous low, the probability of a price reversal improves substantially. This type of setup is shown on chart 1 of Las Vegas Sands. The stock on each minor reaction keeps getting more oversold on each reaction versus the previous one. You can see this at points 1,2, and 3 on the Technometer. This is bullish action.
The same concept is applied on new rally highs. If the top of a rally is accompanied by a Technometer reading that is more overbought than the previous high, but the price holds below the previous high, the probability of a price reversal improves substantially. This example is on chart 2 of Coca Cola. The stock got more overbought on the high but the price held below the previous high. The blue eclipse shows an easy area to enter short positions. This is bearish action.
If, on a reaction, the index or stock makes a new low, but the Technometer does not, we can also look for a reversal in price. Naturally, the reverse is also true. When the top of a rally moves the Technometer into a more overbought condition, but the price holds below the previous high, the chances of a reversal to the down side improve substantially.
Market reversals are important entry and exit points. Maximum profits can be achieved by taking or closing positions at, or near, these turning points.
The Technometer is extremely helpful in identifying reversals. However, it is not an automatic or mechanical indicator. It should be used in conjunction with Wyckoff principles and the other Wyckoff tools.