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Anticipating trend duration and pinpointing potential reversals is the holy grail of stock market analysis, so metrics that reliably predict when a trend is exhausting itself are highly valued tools. Momentum metrics are especially useful because they inform investors about the strength of the current trend and when that strength begins to fade, setting the stage for reversal.

The stochastic oscillator differs from other types of momentum indicators, because it measures momentum by comparing price to its range over time, indicating the degree to which price gravitates towards the high or low for a given period. In a well-defined trend, this indicator simply confirms the message that price is sending. A strong bullish trend, for example, has consistently high readings. This metric's true value becomes evident as a trend nears its end. The stochastic oscillator signals waning momentum even as price continues to rise. If the stochastic oscillator prints a lower high than has previously been attained despite price reaching a new higher high, a contradiction called divergence, it is a strong indicator that bullish conviction is wavering and the trend may be exhausting itself. This interpretation is based on the widely accepted theory that price follows momentum.

Another advantage of the stochastic oscillator is that it includes a second line that reflects its three-day simple moving average (SMA). This second line smooths the data and allows analysts and traders to pinpoint shifts in momentum by looking at crossover points. When predicting potential reversals, investors look for moments when the oscillator crosses through its SMA, indicating that its reading for the current session differs markedly from its recent performance. This signal is especially strong when it occurs while the security has reached overbought or oversold levels, as reversals are more likely at these times.

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