Reversals

On April 25, 2008, Dr. Brett Steenbarger wrote a blog about Anticipating Reversals. Dr. Steenbarger describe a method of tracking the number of Dow issues making fresh two-hour price highs minus those making two-hour lows on a five minute chart.

Below is a similar method using a Stochastic of 15 of the 30 Dow stocks. This Stochastic analysis simply measures where the current close of the 15 stocks are relative to the two-hour range. In other words, if the close is at the two-hour low, the stochastic is zero, and if the close is at the two-hour high, the stochastic is 100. The Stochastic described below is an average value of the 15 stocks, which are:

IBM, CVX, CAT, BA, MMM, DD, JNJ, MCD, WMT, JPM, HD, AA, AIG, UTX AND MSFT.

I tried to use a sample from various segments of the economy to get a broad sentiment indication of the large cap stock market using as few stocks as possible. In the indicator below, the blue dotted line is the 24 period SMA of the stochastic and the purple line is the 38 period SMA of the Stochastic.




In the chart above for 4/24/08, you can see that this indicator can be ahead of the futures market. After the Stochastic MA's crossed to the downside, the futures first tested the last high before started a downtrend.



Again in the example above for 4/25/08, the indicator was ahead of the futures, which tested the recent low before starting an uptrend.

Charles