It's always good to have questions.
NOTE: Our goal in Minyanville is to remove the intimidation from the markets and encourage interactivity in the interest of education. It is with that intent that we share the following exchange.
Hope your day is going well. Some kind of rally, huh? I guess this is where the rubber meets the road(1134 ish). I love the site and the content, but I do have one request. When you (or anyone else) mentions a level or stock, is it possible to post a corresponding chart? An example would be the current discussion on IBM and its stochastics. Keep up the good work and have a great day! Thanks.
Minyan Bill Ryan
Bill - Tuttle (or as Toddo would say 'Tickles') here.
Toddo forwarded your e-mail onto my desk to potentially answer your question on the Int'l Business Mach. (IBM:NYSE) stochastic divergence question.
But, before we get into the answer, let me answer your other question about putting corresponding charts on the site when we discuss certain equities on BB. Personally, I would love nothing more than putting every chart of the stocks we discuss on Buzz and Banter on the site. However, because of the vast amount of individual securities discussed I believe, at this point, it would be impossible.
Onto your question...
Toddo's first BB posting was in regard to the massive Head & Shoulder Top on IBM and the fact that it's broken the neckline, which coincidently, corresponds to the 200 DMA. My reply described other possible outcomes based on going forward technical action.
First - investors should be aware of a possible reversal day. (In other words, a shakeout)
Second - is the possibility of a stochastic divergence happening within the next couple of sessions.
Let's take a look at the graph...
Bill, a few things to notice when looking at a possible stochastic divergence. First is the price action - a new RL on price. Next is the stochastic action. In the graph above the stochastic is higher as the stock is lower. This is where you have to be careful - this is not yet divergence. Divergence occurs when the fast stochastic (small black line) crosses back above the slow stochastic (fatter blue line) at a higher level then the first price bottom. Then, and only then, do you have divergence.
One last note - stochastic divergence does NOT ensure that prices will increase. It's only a road sign to make you aware of the possibility of higher prices.
I've also given another chart, Caterpillar Inc. (CAT:NYSE), to help demonstrate how this looks when a stochastic divergence does foretell higher prices.
Also notice the Volume divergence on the second RL. It's always a plus to have other confirming indicators.
Thanks for the excellent question.
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