Use These Readings to Identify Overbought and Oversold Areas
Investors often find Bollinger Bands very useful because they show when index or stock levels are reaching extremes.
This is accomplished because Bollinger bands (on a 20-2-2 setting) measure the tick action against two standard deviations of action.
Typically, when a tick is above or below the extreme bands, it indicates an overbought or oversold condition. So traders pay attention when this happens because a pull back or rise from a low is highly probable.
One way to ascertain if this may be the case, is to look at the level of a 9 day RSI indicator reading. If it is in the 70 to 80 area, then the market is reaching an overbought area. If that reading coincides with a tick above the upper Bollinger, then the overbought possibility becomes a higher probability. ((The opposite applies (20 to 30 area) on the down side.))