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Thursday, April 07, 2005
Market Recap
Crude oil prices were down $1.74 again today, the 4th straight day it has been down since its pre-market high of $58.25 on Monday morning. This drop in oil led the stock market higher today with the Dow gaining 60 points, the NASDAQ gained 19 points and the S&P was up 7 points. All of these indices closed the day on their highs of the day which is a positive.
On Wednesday morning, in the pre-market update, I mentioned that the Slow Stochastic indicator on the NASDAQ weekly chart was about to turn up and that could signal a rally is on the way. I then showed that chart in the commentary on Wednesday evening so you could see what I was talking about. As I looked in the Topic index on the website, I noticed that I have never explained this indicator in our indicator series so I will do so tonight in case some of you are interested in using the Slow Stochastic indicator in your trading.
Slow Stochastic Indicator
The Slow Stochastic (slo sto) indicator consists of two lines: the %D line and the %K line. The %D line is the more important of the two lines in the indicator and is the one to watch when making your trading decisions. The slo sto measures a stock's most recent close relative to its price range over a specified period of time. If a stock is strong, it will most often close near the highs on the daily bar in an upward trending market, if it is weak, it will close near the lows on the bar as the stock trends down. As the stock gains momentum in either direction it will cause the slo sto to get stronger in the direction of the stocks trend. Once the trend begins to slow down, the stock will tend to close further away from the high or low of the daily bar and this will cause the slo sto indicator to turn in the opposite direction, signaling you that the stocks direction is about to reverse.
Works Best in Flat Markets
Keep in mind, this indicator works well in flat or directionless markets. The slo sto is not reliable in trending markets Bull or Bear because this indicator can stay overbought or oversold indefinitely in a market or stock that is in a strong trend. You will know if a stock is in a strong trend by using other indicators I have discussed here before. This is why you have to use more than one indicator when making trading decisions. For instance, if I am looking to trade a stock that is overbought (slo sto above 80) I will look at another indicator called the ADX and if this indicator is above 30, I know I have a stock in a strong trend. This strong trend makes the slo sto unreliable for trying to play a reversal because the stock is trending strongly and the chances of reversal are slim. If the ADX is below 20, then I am in a trendless market and the slo sto becomes more valuable to me because I know from the ADX indicator that the trend is not strong and that an overbought or oversold reading on the slo sto will more than likely end up reversing in the opposite direction and I can profit long or short from this overbought or oversold situation.
Above 80 and below 20
The slo sto meter runs from 0-100 and an overbought condition is above 80. An oversold condition is below 20. As long as the reading remains above 80 there is no reason to ever sell if you are long. If you are short and the reading remains below 20, you can stay short. Your signal to close the trade will be if the %K crosses the %D and then both lines move below or above 20 or 80 respectively. The %K line will always turn before the %D line. The key is when the %D line confirms by turning soon after the %K line does. Once this happens, it signals a reversal of the trend. If the market is choppy, you can take these trades both long and short however, if a stock is trending down or up, I would only take a trade in the direction of the stock once you get a trading signal from the slo sto indicator. Remember, the crossover in the opposite direction of the trend is the signal to close the position once both lines cross below 80 or above 20.
Reiteration
Remember not to misread the slo sto. I want to reiterate that just because the slo sto is overbought and is at 80 or above, it does not mean that you should sell your long position. Stocks and markets can stay way overbought for long periods of time. Stay long until both the %K and %D lines fall below 80. Only then is it time to sell. A reading of above 80 simply means that the trend is very strong, therefore I do not believe there is any reason to sell if a stock is trending up.
Important Announcement
There will be no bulletin or commentary the week of Apr 18-21. It is spring break and I have a trip planned with my family. This is the first vacation I have had since September 2003. I will do a bulletin on Sunday Apr 17th and the next bulletin will be the following Sunday Apr 23rd. I will miss 5 trading days and 4 bulletins but will have stop prices listed in the Sunday bulletin on any positions I leave open. If those stop prices are reached, Mike Serven will send the sell alerts.
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For New Members
For all the new members with us, please make sure to read the link “How to use Bulletin” at the bottom of the Bulletin page on the website. It is critical you know how to use this trading tool before trying to trade the stocks mentioned. The effectiveness of your trades will diminish if you do not completely understand how the information is presented.
Earnings Calendar
Don't forget to check your short-term holdings and know when those companies are reporting earnings. Holding a stock through earnings is risky and I do not recommend it. You can always buy the stock back after the dust settles.
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