StockFetcher Forums · General Discussion · CONVERGENT STOCHASTIC THEORY<< 1 2 >>Post Follow-up
EWZuber
1,373 posts
msg #28093
Ignore EWZuber
8/27/2003 3:07:09 AM

Thought I would throw this out there since I have been hearing some talk about 'head fakes' on these threads. The Convergent Stochastic Theory as I call it explains this phenomonon very well.
There are several different time periods that need to be consideren when entering or exiting a position. Quarterly chart, Monthly chart, Weekly chart, Daily chart and Hourly ( etc ) chart cycles and indicators. For purposes of this discussion I will deal only with the Monthly, Weekly and Daily here. The stock WDC is a decent example of what one might call a 'head fake'. On 7/21/03 WDC became oversold at a stochastic value of 6 on daily charts. This is usually considered very oversold. It tested the middle of the double top pattern at $11 as support and confirmed it bouncing up and starting the accumulation phase. It tested the 25 & 50 DMAs as resistance and broke above them. But the stock then crashed breaking below the avalanche point of the double bottom pattern and dropping another $3. How could this happen and was it avoidable? Now look at the Weekly chart and you will see that the Weekly chart stochastics were not sufficiently oversold considering that the Monthly chart stochastic cycle had just entered into distribution and had a fast line cross at the top of the cycle in mid May. So by July 21 the monthly and weekly chart cycles were both moving together in their distribution phase. This puts a counter active force on the daily chart cycles if they are trying to enter an accumulation phase and has a muting affect. When weekly chart stochastics fast & slow lines converged at a cycle bottom and the Weekly and Daily chart stochastics moved closer into phase with one another then the stock could begin true accumulation phase ( today ) and overcome some of the affects of the Monthly cycle that is in distribution. So if you want things to go your way more often it seems to me that it is wise to see if the stochastic cycles of different time periods are all working together, or have convergent phase relationships. I use this all the way from Yearly charts to 1 minute charts.
The implications of this Theory are, IMO, tremendous and can save one from making a lot of mistakes.
Best of fortune. EWZ



marauder
6 posts
msg #28148
Ignore marauder
8/29/2003 2:02:20 AM

WDC declined nearly $3 on July 25th not because of stochastics, but because of a negative report and its subsequent downgrade by Needham & Co.

From CBS MarketWatch:

"...Western Digital dropped 15 percent to $9.95. The disk-drive maker reported fiscal fourth-quarter financial results that were better than expected, but the company's purchase of Read-Rite created uncertainties investors didn't want. The purchase of Read-Rite, which makes disk-drive recording heads, was approved Thursday by a bankruptcy court for $95.4 million in cash."


EWZuber
1,373 posts
msg #28154
Ignore EWZuber
8/29/2003 11:15:19 AM

There can very often be some other explanation or way to account for the execution of technical indicators. For instance if you look at the WDC board on raging Bull, I ( alias 65degn ) mentioned earlier in the week that WDC was up against resistance of the descending 25 DMA that if broken would be worthless as support so WDC would either be held back and confirm this as resistance or gap up to a price support level from a previous cycle high. I said that it seemed that the latter was the most likely. Well, the very next day WDC gapped up to a previous price support and the 'explanation' was that WDC had revealed that the acquisition of RDRT would be accretive to earnings. I really don't care about the news much, I'm just concerned with the action. I could cite you another hundred examples of 'head fakes' that had nothing to do with any news and are purely technical in nature and they could all be shown to be related to the phase relationships of the stohastic waves. If I get time I will attempt to give better examples.


EWZuber
1,373 posts
msg #28157
Ignore EWZuber
8/29/2003 6:29:31 PM

A for instance. I have chosen a large scale technical scenario for ease of study. The stock is LLL. The chart begins around the end of 2001. You will find that the chart for LLL is almost identical to the chart for the DFI, the Amex Defense Index. Notice that we have increasing EPS throughout the entire chart.
Starting around 9/19/01 using daily charts is a nice bullish move higher. Then LLL creates a series of 'head fakes'. On 10/15/01 there is a stochastic fast line cross above the slow line typically indicating a new accumulation phase has begun but the cycle hardly gets off the ground. Then on 10/19/01 LLL drops to a very oversold level of 7 and on the 23rd we have another fast line crossover. The longer term uptrend is intact at this point with a higher low than formed on 9/19/01. However this accumulation cycle fails to create a new cycle high compared to the cycle high on 10/8/01. An investor buying at the bottom of the cycle on 10/23/01 would have ended up with their position in the red by the end of that cycle on 11/15/01. How could this have been avoided? Now look at the weekly chart and all of a sudden it becomes very plain what forces were at work here. On 10/7/01 The fast and slow stochastic lines were already beginning to converge. By about 10/14/01 we had a fast line cross below the slow line indicating the start of a distribution phase on the weekly chart. Not until the beginning of December 2002 do we have a fast line cross above the slow line on weekly charts again indicating a new accumulation phase. Also in the beginning of Dec. the daily chart stochastic begin a new accumulation phase and this is where stochastics are all aligned in phase with each other. Now the stock begins a long term uptrend. The 'head fakes' were totally avoidable using these tools. Also the long term uptrend was predictable by going to the monthly chart and seeing that we now have the very long term stochastic cycle in it's accumulation phase also. So we have all 3 chart cycles all converged in phase, all trying to move the price in the same direction. What this does is create a huge momentum in a single direction. Any electronic technician knows that it is phase relationships of RF waves that make a Yagi antenna work or any directional antenna for that matter. Its like having 3 people trying to push a car but they all push with different timing. When someone finally says, 'OK on the count of 3 we all push' then the car really starts moving. Thats converging phases. There is more to this, this is just the basic idea. You can imagine the implications of something like this for long term positions and it works excellent for daytrading too. The easiest way to study this theory is using 3 charts at a time, one for each time period.
EWZ




jlmj
4 posts
msg #40319
Ignore jlmj
1/16/2006 12:16:09 AM

EWZuber

The easiest way to study this theory is using 3 charts at a time, one for each time period.
EWZ
_______________________________________________________________________________

I have stumbled across your CONVERGENT STOCHASTIC THEORY and am tring to utilize it in my trading.

I am using one of your weekly slow stochastic cross over filters for scanning.

Show stocks where Weekly Slow Stochastic(5,3) Fast %K crossed above Weekly Slow Stochastic(5,3) Slow %D within the last 2 Weeks and Weekly Slow Stochastic(5,3) Fast %K is below 50 and Slow Stochastics(5,3) Fast %K crossed above Slow Stochastics Slow %D within the past 1 day and Average Volume(30) is above 100,000 and Volume is above 100,000 and the close is between (your price range).

I was having a hard time lining up 3 charts of monthly, weekly and daily to get
a good visual of the stochastics at the same time
I have been using Quote Tracker for some time but just downloaded the new beta version that has interactive historical charting and now its much easier for me to clearly see the 3 different chart cycles on one page.

I dont know if you use this already (i think i read somewhere you use bigcharts) but wanted to let you know it looks good and hopefully it will help my trading
you can also line up hourly ,15 min or whatever time frame you want.
would like be interested to know how you or others would set up and trade off of these

Also would like to see some more of your weekly stochastics filters

Thanks

Jack



nikoschopen
2,824 posts
msg #40320
Ignore nikoschopen
1/16/2006 1:26:09 AM

It's prolly not my place to butt in, but since I've been consistently using Stochastics throughout much of my trading career I thought I should pitch in my geezus-I'm-a-jinius two-cents contribution.

When it comes to using stochstics, I use two stochastics (one over another, not superimposed). The parameters I use are Slow Stochastics (7,3) & Slow Stochastics (39,1). You can reference Stockcharts.com for more information on Slow Stochastics (39,1). Basically SS(7,3) is used as a short- to intermediate-term vehicle and SS(39,1) as a long-term instrument. For a bull play, what you're looking for is an overbought SS(39,1) -- over the reading of 70 -- with the SS(7,3) emerging out of the oversold territory. For a bear play, the opposite holds. Look for a oversold SS(39,1) while the SS(7,3) starts to drop below the overbought line. How simple is that? Believe it or not, this also works on intraday charts as well, if not on the weekly charts.


maxreturn
745 posts
msg #40323
Ignore maxreturn
1/16/2006 8:04:06 AM

jlmj, there is an excellent charting software that I've been using for a while now which will allow you to plot various different time frames (price data AND indicators) in the same window. I use the EOD version which I think costs only $45 or so now. Following is the link. You can download a free trial version:

http://www.tickquest.com

Best Regards
Max


JohnyYuma
57 posts
msg #40328
Ignore JohnyYuma
1/16/2006 4:48:10 PM

jlmj
I believe you are referring to Medved Quote tracker.
How do you find it? pros ? cons ? - especially, considering it's free.
Appreciate your help
Thanks


jlmj
4 posts
msg #40351
Ignore jlmj
1/17/2006 12:16:47 AM

nikoschopen

This was the only thing at stockcharts i could find

http://stockcharts.com/education/TradingStrategies/lastStochastic.html

they talk about SS(39,1) crossing over 50 and using the OBV as a confimation
Interesting
do you have a link to the info at stockcharts you are refering to

Thanks
Jack




jlmj
4 posts
msg #40353
Ignore jlmj
1/17/2006 12:26:42 AM

JohnyYuma

Yes Medved Quote Tracker is great
It does way more than i can ever make it do
Its even better now since they just released the new interactive historical charts
they also have great support
I do pay for the upgraded version but the free version is plenty
I think the only difference is you get 10 days of intraday charts instead of 2 or maybe 3
Also no ads

Jack


StockFetcher Forums · General Discussion · CONVERGENT STOCHASTIC THEORY<< 1 2 >>Post Follow-up

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