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Sorry fellows but a oscillator can be extremely importatant in a trending
market.
I will comment on the stochastics. But for the most part all oscilators have
the same property of convergence & divergence
If a stock is trending upwards usually it bounces up & down a bit along the
way. From the top of the channel to the bottom or the middle, etc. Hence it is
OSCILLATING.
The problem occurs when you can't find correct number of days to correctly
match up with the oscillations of the trend. But if you can't see the math
behind the formula it makes it tough. In the past the best way to describe the
Williams %R & a stochastics is with the bead on an abacuss analogy. One end
represents the lowest low value over some time period. The other end the
highest high value. The close is the bead on the abacuss. The indicators are
the abacuss itself.
As the close moves closer to it's previous highest value, the oscillator goes
into the overbought region. But that is ok. As the attached charts will show.
The stochatics has unique property for measuring both a trend & the
oscillation.
The Oscilattion occurs during the overbought/oversold conditions. The trend is
measured in the convergence or divergence.
NOTE: Convergence means that two trendlines would meet & cross at some point if
both were extended to the right. Divergence means that two trendlines would
NOT meet & cross at some point if both were extended to the right.
The charts will show this.
Sent seperately will be several .gifs to show what I mean.
GM1.gif & GM2.gif- General motors.
The GM1.gif shows the first move up.
The GM2.gif shows the 2nd move up.
Comments are made on the chart.
The oscillator is a superpostion stochastic. In general this stochastic reaches
oversold at the bottom of the channel & overbought at the top of the channel.
Two charts are needed to show the channel progression.
Here is the formula:
(Stoch(2,2)+Stoch(3,3)+Stoch(4,4)+Stoch(5,5)+Stoch(6,6)+Stoch(7,7)
+Stoch(10,10))/7
Then add your 80, 20 lines.
The next chart CISCO1.gif will show a "Bearish Divergence". Here I am using a
14 day RSI.
On the chart-
High 1- represents the end of the channel.
High 2 represents the beginning of the channel.
Low 1 - is the lowest low in the channel.
The chart is marked with two 1s. They correspond to the trend lines from high
to high of both the security & the 14 day RSI. Both start & stop at the same
point in time.
Since the RSI is trending lower, while CSCO is headed higher. We say that a
"Bearish Divergence" has occured.
REMEBER: Convergence means that two trendlines would meet & cross at some point
if both were extended to the right. Divergence means that two trendlines would
NOT meet & cross at some point if both were extended to the right.
Also notice points 2 & 3 on the chart. This also trends lower. There is a dark
red horizantal line that has the same height as the bottom of the RSI at point
3.
The horizantal line serves as support. If the RSI falls below this horizantal
line the "Bearish Divergence" is confirmed. This is called a "Failure swing."
The last chart is ARSW1.gif. This shows a "Bullish Convergence".
Trend line 1 & trendline 2 show the convergence.
3 is the channel breakout & 4 is the failure swing.
Harley Meyer
meyer093@xxxxxxxxxx
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