Lane's Stochastic and Stocks Screening (Part 2)

2. The second important signal generated by Lane’s Stochastic is the crossover between the %D and %K lines. It is considered a buy signal when the %K line rises above the %D line and a sell signal when the %K line falls below %D. To avoid whipsaws you can wait for crossover accruing within overbought/oversold area, or after a peak or bottom in the %D line.

3. The third and one of the most reliable signals is divergence between %D and the price. A bullish divergence occurs when price makes a series of lower lows while %D makes a series of higher lows. A bearish divergence occurs when price makes a series of higher highs while %D makes a series of lower highs. You can use following links to see the list of S&P 500 members that currently have bullish or bearish divergence:

http://www.thegreedytrader.com/StochasticBullishDivergence.aspx
http://www.thegreedytrader.com/LaneStochasticDivergence.aspx

Now when we know the basics, we can discuss the advanced techniques. The most important and difficult question is when to apply Lane’s Stochastic. The basic assumption of stochastic is the certain market cyclicity. The simple technique will present useful signals for intermediate top and bottom in trading market, but in strong trending market stochastic is too sensitive to generate reliable signals. We would like to stress it again that stochastic oscillator is a momentum indicator. Momentum indicators help identify turning points, but it needs to be used in conjunction with trend following indicators or trend analysis.

The simplest and one of the most popular trends following indicator is the moving average. A lot of technicians use stochastic oscillator in conjunction with MACD – moving average converge/divergence indicator. MACD is the trend following indicator that can help to identify the direction of the major trend. Then you can use the stochastic signals to trade in the direction of the major trend.

Use the advanced technical analysis stock screener to find a list of oversold stocks that have a substantial long-term uptrend:

http://www.thegreedytrader.com/OversoldUptrend.aspx

And the list of overbought stocks that have been in long-term downtrend:

http://www.thegreedytrader.com/OverboughtDowntrend.aspx

Using oscillators in conjunction with trend analysis and patterns recognition is probably one of the most profitable techniques devised for the experienced trader. Oversold/overbought conditions and stochastic divergence usually confirm termination patterns and give useful tips about when the current trend is about to change. The following link presents a list of oversold stocks with price near the monthly support trend line for S&P 500 members

http://www.thegreedytrader.com/OversoldSupport.aspx

And list of overbought stocks with price near the monthly resistance trend line:

http://www.thegreedytrader.com/OverboughtResistance.aspx

Trend support/resistance lines confirmed by oversold/overbought stochastic indicators and price divergence would present most reliable and accurate signals and often help to pick the bottom/top of the price trend.