the hAnDbook of technIcAl AnAlySISBounded oscillators fluctuate between 0 and 100 percent and hence their cen-
tral or equilibrium value would be at the 50 percent level. Unbounded oscillators
have no upper and lower limits, and as such the zero level would best represent
the central or equilibrium level. Signals are indicated as follows:
■ (^) Oscillator crossing above its equilibrium level is a buy (bullish) signal
■ (^) Oscillator crossing below its equilibrium level is a sell (bearish) signal
It must be noted that these only represent signals and should not be re-
garded as triggers for entry. The main reason why oscillator signals should be
regarded as merely indications of potential sentiment and not actionable signals
is mainly due to the possibility of misrepresentation resulting from a phenom-
enon referred to as divergence. With divergence, higher highs in price may be
accompanied by lower highs in the oscillator, causing market participants to
initiate shorts or liquidate positions in the market without evidence that price
is actually reversing. Figure 8.7 depicts the bounded RSI 50 percent equilibrium
level crossovers generating buy and sell signals on the daily chart of Goldman
Sachs Group Inc. Notice that, using the defaulted lookback periods for the RSI
and the commodity channel index (CCI), the buy and sell signals generated by
both oscillators are nearly identical. The unbounded CCI generated signals via
its zero level crossings.
fIgure 8.7 RSI 50 Percent Level Crossovers Generating Buy and Sell Signals on the
Daily Chart of Goldman Sachs Group Inc.
Courtesy of Stockcharts.com