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The signals I'm about to describe may be difficult to understand and the text or description difficult to follow. Moving averages are simple to understand and use. Unfortunately, they are not necessarily the best strategy. You will have to refer to Figure 1 frequently. The important areas of interest have been lettered to assist you in following along. The calendar dates are shown in Table A. Here too, important prices are lettered and highlighted or circled. In the text I will refer to the various forecasted values as HIHI, LOLO, etc.

In the following discussion, I will assume the entry of the appropriate stop-loss protection after a long or short position.

8/17: On this day prices opened higher and found resistance at the ARHI at 166.994.

A) The 16560 low (A) is 15 points higher than LOHI. This could be the support point since the market is in an uptrend on daily charts. %D values are rising—bullish. A REG K/D crossover to downside occurs at 1400. At 1430, Slow K/D crosses over.

(B)A short position could be entered in this area. It is late in the day so the trade may be carried over into 8/20. This is up to the individual trader. This is a Friday and involves additional risk. If the position is carried over, the HIHI for Monday will be the first line of defense.

8/20 C) The market opens 10 points above ARHI with %D values declining. Sell short or maintain existing short position. A new position here would have to be entered quickly. Prices decline to below the HILO which normally means a test of ARLO.

D) From 1100 to 1300 hours, there is bullish divergence between %D and the lows. Prices are

supporting 30 points above ARLO. The chart pattern is a possible double bottom. Slow K/D

crosses over up and down. (This fluttering can make stochastics tough to test on back data.) The

important points in this area is the proximity of the ARLO support and the rising %D values

(bullish divergence). Go Long.

E) ARHI now becoming resistance. Should be able to liquidate longs no worse than close: 16660. The question of a short sale arises here also. Prices are at highs and %D values are also at higher levels than points (B) and (C). I think this type of pattern is a judgment call.

8/21 (F)The Market opens through the ARHI. %D starts rising. REG K/D crosses to plus side at 930. This market should test HIHI. If short, buy back and go long. In the next time period the prices break HIHI and close above it. %D reaches new highs. The SPU has clearly broken out to the upside. The first turn down in %D is at 1130 indicating potential weakness. The market is 175 points above the HIHI. The market is now between "fear and greed". Probably should be looking to liquidate above 17000.

(G)Price runups are on decreasing %D—bearish divergence. This market could consolidate or react sharply. If you elect to sell short this kind of market, be prepared to cover quickly.

(H)Prices react 140 points as REG K/D crosses back to plus. Slow K/D takes two periods longer to cross. Aggressive traders would buy this back no worse than 17000, but it is late in the day. Do not buy unless you are prepared to take a small loss or carry it over.

8/22:The market opens steady. Re-enter longs. Resistance should not be lower than 17040 and most likely prices should challenge ARHI since SPU is still in an uptrend.

(I) New highs 25 points below the ARHI with big bearish divergence with %D. This cyclic high

should be compared to %D values at (G). This is a definite sell signal. Liquidate long and sell short. You should be able to establish a short between 17100 and 17040. This is also a REG K/D

cross over. The market breaks 185 points from the high in 11/2 hours. d) The market gives another chance to be short on the retracement to 17050. The end of the rally is (K).

(J)The new lows in %D at a) are a possible "bear set-up" (see Lane's article). The rally to (K) is fast and the %D shows almost no strength. (During these periods I will go down to 5-minute and

2-minute bar charts and oscillators.) (K)Retracement high.

(L) At the close the market is very oversold and prices have reacted near HILO. Take the money.

8/23: (L)The market opened higher and immediately sold off finding support 15 points above ARLO. There is no clear cut K/D signal here. If you were to take action on K/D crossover at 1000 hours, prices have rallied 85 points from the lows.

(M) Prices reach 35 points below LOHI, a bearish divergence. This could be short sale for a move back to ARLO. Also the (M) rally with higher 96D readings than (I) may be interpreted as a "bull set up". Look to key in on the next signal.

(N)K/D crosses over with %D values higher than (L). Cover short and go long. As it happens, the (N) signal was profitable.

ARIMA and Stochastics

Divergences between %D and price can take place at cyclic highs or lows or at individual points such as (D) and (G). Also, I have seen a lot of good REG K/D crossovers occur on the left-hand side instead of the right hand side described by Lane as the most desirable. If prices are near ARIMA support and resistance, I would be inclined to take the signal. If you use slow stochastics, you will never get right hand crossovers. The Regular Stochastics is a little messy on a plot, but it does give earlier signals.

I believe a marriage between ARIMA and Stochastics to be potentially rewarding for a trader. I leave the chore of tallying the potential profits or losses resulting from the simulated trades to the reader. Some of these comments have been made with benefit of hindsight after studying thousands of price charts with oscillators. I do employ these guidelines in actual trading.

Will Rogers probably had the best trading approach. To paraphrase him: "Buy stocks that go up. If they don't go up, don't buy them."

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I would be delighted to discuss this or any article further with you. Call at (314) 993-6225 or write to 1601 South Lindbergh Blvd., St. Louis, MO 63131. Good trading to all of you. After all, it's easy—just like taking candy from a gorilla.

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