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Slow Stochastics: When Timing Is Everything


A free and easy tool for both investors and traders.


Investors frequently look for a timing tool to help determine entry and exit points for their longer-term positions; traders are obviously interested in one to determine the same for their short-term interests.

Of course, many in both camps would prefer an affordable tool that doesn't require a PhD from MIT to use.

Such a tool exists - one that's both reliable (as in predictable) and affordable (as in free). The technical analysis tool I'm referring to is called Slow Stochastics.

Slow Stochastics is a tool found on many free charting services. It uses 2 plotted lines: 1 represents a shorter time period than the other, thereby acting as moving averages over slightly different time periods.

According to

"The Stochastic oscillator compares where a security's price has closed relative to its price range over a specifically identified period of time... In an upwardly trending market, prices tend to close near their high, and in a downwardly trending market, prices tend to close near their low.

"...As an upward trend matures, price tends to close further away from its high, and as a downward trend matures, price tends to close away from its low... These are the conditions (that) indicate the beginning of a trend reversal."

The application of this tool is the best way to see its value.

Click here to enlarge.

As the first chart shows (2008 year-to-date), whenever the Slow Stochastics reading exceeds 80, the price of the asset (in this case, the S&P 500) is overbought. Whenever it registers a reading below 20, the price is oversold.

In both cases, the asset's price action will either pullback (from an overbought condition) or rally (from an oversold condition). While prone to greater number of mixed signals, Slow Stochastics can also work for traders on an intra-day basis using a minute-by-minute chart, as seen in the following chart (December 9 and 10, 2008).

Click here to enlarge.

Several points to consider:

  • Slow Stochastics works most effectively for investments that track more than one issue, such as an ETF. It tends to be less effective when applied to an individual stock, as there are many other issue specific factors that push and pull the price action.
  • It also works best in the extremes. When Slow Stochastics moves off its extremes and enters the zone between 20 and 80, its predictive value diminishes as it becomes a trend reinforcement tool.

  • It's best used in conjunction with the near-term momentum indicators of Momentum and MACD. For example, as the third chart on the Biotech ETF (IBB) shows, when Slow Stochastics is oversold with a rising Momentum and MACD, an excellent entry point has been formed. Conversely, if an ETF's Slow Stochastics is overbought with a declining Momentum and MACD, the probabilities are high that the price is headed south.

    Click here to enlarge.

  • The long-term Mega Trend (see prior article The Mega Trend is Your Friend) is the larger time context for all investment decisions as it places in context the current market action.

Investment Strategy Implications

Nothing is perfect - and certainly nothing works 100% of the time. However, Slow Stochastics has proven itself to be a very reliable short-term timing tool for both investors and traders.

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No positions in stocks mentioned.
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