Update 4/29/16- In watching and researching this further, with an eye to my past buys, I am finding there is more assurance of buying "low" when just using the primary buy signal based on Zweig breadth ratio below .375 and $nahlr at least below .07 These are overall generic market indicators whereas the stochastic is based on the one stock you are looking at-which may have its own individual problems
The stochastic of an individual stock can give you a false signal that does not take into account the companies issues at that time, nor the general market condition. The only ones I would consider are those whose chart looks like a normal dip witnin a continuing uptrend.
As opposed to the Zweig Breadth ratio mentioned in another blog entry, the Stochastic is an oscillator, which means it is designed to vary in value between 0 and 100.
This is an idea I received from an online friend whose handle is Hirailman. He does a huge amount of work with spreadsheets and indicators and he suggested that I look at the correlation between the full stochastic 144,1,1 and buy points. In a word, its great but needs caution before using it all by itself.
Developed by George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods. According to an interview with Lane, the Stochastic Oscillator "doesn't follow price, it doesn't follow volume or anything like that. It follows the speed or the momentum of price. As a rule, the momentum changes direction before price." As such, bullish and bearish divergences in the Stochastic Oscillator can be used to foreshadow reversals. This was the first, and most important, signal that Lane identified. Lane also used this oscillator to identify bull and bear set-ups to anticipate a future reversal. Because the Stochastic Oscillator is range bound, is also useful for identifying overbought and oversold levels.
As we all know, there is no perfect indicator, so I attempt to use indicators which are as close as possible, in an imperfect world. Long story short, readings of the stochastic 144,1,1 below 5 are very meaningful if you want an oversold condition to buy into a quality stock you wanted to purchase. Example below is nice because it shows you how its not perfect, but in hindsight, close.
Please look at mid June 2014 entry signal approx $48, and HEI fell about another 5 points, before rallying to 62.5. Moving ahead to late July 2015 at approx $53, again it was early but after falling another 6 points, it then has rallied to $73 as of 8/24/16
Also of note, the other signal I favor occured Jan.15,2016 where the Zweig breadth ratio fell below .375 accompanied by the $nahlr falling below .01, HEI was approx $51 at that time.
Sometimes the stochastic signal will coincide with the Zweig-$Nahlr signal and/or the AAII signal, other times not.
The one very important caveat is bear markets, I was just looking at the worldwide subprime meltdown period and saw a buy signal in late 2008 but things continued down at least another 33%. That said, another signal occured when down there, and one could have added positions to lower average cost.
2/22/17-note: if you have a high $cpce reading (.90+) at the same time as a full stochastic near zero, all the better, more confirmation. This happened in early November 2016 when PSA was already at an already low full stochastic-near zero. The $cpce alone is not good enough to be a standalone indicator in my opinion, but make an excellent confirm for the full stochastic.
10/23/17 - CHD - Church and Dwight , full stochastic reading of 4.88 (very low), long term chart shows calm, measured uptrend, boring business selling the same fine products every day. Rated A by Value line. I bought more last week and am now at an over-size position for my portfolio. I will skim off profits after the next rally to trim back the position size.
10/27/17- HSIC , Harry Schein , rated B+ by Value Line , Henry Schein, Inc. (Nasdaq:HSIC) is the world's largest provider of health care products and services to office-based dental, animal health, and medical practitioners. , full stochastic reading of 5.31 (very low), I bought a few weeks ago when the full stochastic was also low.
Disclosure: I am/we are long HSIC.
Additional disclosure: This blog entry is part of a series I am writing about free and public stock indicators. None of these will be perfect, I am always looking for what can be "as close as possible". None of my blog posts are investment advice, just describing methods of buying low on downswings. Every indicator you read about here is both public and free, so you can follow them yourself.