rx,
You are right that the 5-3-3 is heading into oversold range, but there is no hint of a sell (i.e., cover short) signal yet.
The general rule is that the 15-5-5 (and the 13-7-7) stochastic will get you a bit later entry, and so you will tend to miss some of the move. But you will also be subject to fewer false signals.
The 5-3-3 responds more quickly, and will get you in more quickly therefore, but will also give you more false signals.
Using the 15-5-5 to enter a position will usually result in you missing some of the move, but it is an indicator you can place more confidence in when it does signal.
A very good strategy for those who are adamant about limiting losses (I am!) is to wait for the 15-5-5 signal to enter, and exit with the 5-3-3 signal.
In the case of RIMM therefore, the exit signal is approaching more quickly with the 5-3-3, and you will therefore cover sooner on a short if you follow it. But your chances of a short squeeze are less that way.
Personally I would follow the 5-3-3 exit signal for a short position, partly because the profit constraint on the downside must always serve as a barrier to blunt profits (i.e., you get diminishing returns as a short continues to go your way), and therefore I think you are well advised with shorts to tolerate less losses than you would with longs. In other words, take short profits earlier, and cut losses sooner.
Note also that the 5-3-3 stochastic is superior to the PROC, which is normally a very sensitive and very early indicator, though not as specific.
Please keep in mind that these guidelines are general, and each specific situation should be checked by verifying the accuracy of the 5-3-3, 13-7-7, and 15-5-5 signal IMHO. For some stocks, one signal is all you'll need, for others this won't be true. And while a 5-3-3 signal may work very well for one stock, it may not work very well at all for another.
Look at AMSC, for example. Flip the stochastic setting back and forth from 5-3-3 to 15-5-5 to 13-7-7, and back again.
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Now, tell me which one you think is the best, and why!
WS |
