Trader Mike

I’m still working my way through the November issue of SFO magazine. There’s a very good article by Nina Cooper in that issue about one of my favorite indicators - stochastic: “Facts and Myths of Misunderstood Stochastics” [(free) subscription required] It covers a lot of info about stochastic but the crux of the article is debunking these two myths:

Overbought/oversold readings imply a trend reversal.
Stochastics are useless in trending markets because they go to an extreme and stay there.

I’d bought into the second of those but the author makes some good points about how the indicator can be useful in trending markets.

I love how the market sets itself up for these ‘big bad events’. You can just see the anticipation, and now hesitation, over tomorrow’s jobs report. The NASDAQ has rallied from deeply oversold territory right smack into several levels/types of resistance. It’s now perched just below the top of its downtrend channel, just under 2000, and the downward sloping 50-day moving average looms just a bit higher. Add to that yesterday’s hanging man as well as what looks to me like a deliberation pattern and overbought stochastic. All of that tells me that the NASDAQ is a screaming short under yesterday’s low. Of course the report tomorrow …

Today was another one of those days where we got better than expected economic news which caused stocks to sell off and bond yields to rise. Although we’re still range-bound, there was some interesting action today.

The Dow is still at the upper end of its range and is in overbought territory based on my stochastic indicator. The S&P 500 and NASDAQ charts look a little different though. The S&P has also reached overbought levels but it has only risen to the middle of its range. It also dropped back beneath its 50-day moving average, and looks like it’s in a downward …