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Strategies & Market Trends : Playing the QQQQ with Terry and friends. -- Ignore unavailable to you. Want to Upgrade?

To: Gush who wrote (123)	5/17/2005 7:34:06 PM
From: Walkingshadow	Read Replies (1) \| Respond to of 4814

You are right, stochastics over 80 are in general a reasonable barometer for overbought, and stochastics under 20 similarly indicate oversold. But... this varies from stock to stock, and is significantly dependent on the strength of the underlying trend. Look at this chart... AAPL only hit oversold status once or twice in the past year, but several times the stochastics were overbought and stayed that way for a month or more! AAPL: 139.142.147.218 Now look down at what was happening with the relative strength compared to the Nasdaq composite, and I think you'll see why this happened. So in my view, using OB/OS as potential buy and sell signals can work very well, but only when stocks are in a stable, orderly trend in one direction or another. When the strength of the trend changes, or when the trend direction changes, both these things make OB/OS less and less useful if you define OB/OS in the usual way. At these times, defining OB/OS is not straightforward, and is not simply a matter of looking at the stochastic value. Sometimes it is very useful to draw trendlines across the the peaks and troughs of the momentumm indicators. In fact, that is one thing I did that convinced me that the medium term correction in QQQQ had ended----the trendline across the peaks in the stochastics had been downsloping since mid-November: 139.142.147.218 I remember posting at the time that there was bearish divergence, because prices were not declining with the stochastics, and in fact were still rising! That is NOT a good sign! Then, in December, we saw confirmation of those deteriorating technical momentum indicators in the OBV, which began declining and forming a series of lower highs and lower lows. I posted about that as well, and thought that was a very bearish sign, and most people thought I was nuts, that the market was celebrating the Bush victory, and there would be a Santa Claus rally and so forth. I guess the market decided to become Scrooge, because there was no Christmas rally after all... but seriously, this once again tells me that conventional wisdom is... well, conventional. And therefore prone to error. Here's another example: "sell in May and go away." So, we're entering the summer doldrums now, and the market will go nowhere this summer. You heard it here first: summer or no summer, this market will rally. It doesn't care about conventional wisdom. And, it didn't care last summer either, when there was a tremendous rally off a V-bottom right smack in the middle of summer that just kept right on going through Labor Day, when nothing is supposed to happen because most of the traders are away on vacation! And really, it continued right on into the beginning of December before unraveling, and turning into a medium-term correction. Well, anyhow, if you draw a trendline across the tops of the OBV peaks, you can see that this trendline also was recently broken to the upside, at the end of April to be exact. And, I posted that this was a very bullish sign and that the end of the correction was therefore at hand (also based on other evidence). So I think the moral of the story is that "Keep It Simple Stupid" works just fine as long as things are simple.... like in the middle of an orderly trend that is not changing in trend strength with stable volatilities. But at all other times, proper interpretation of the technical and momentum indicators is not at all straightforward, and often requires very careful, detailed scrutiny and analysis so you are not misled. T P.S. Let me know if this seems clear or not, and of course feel free to disagree or ask whatever questions you like.