The good news is – There are still hot real estate markets you can find where prices are expected to rise for the next ten years.
The bad news – You will need to move to the Middle East to take advantage of them.
Real estate sector 'to see continuous growth'
http://www.gulf-daily-news.com/Story.asp?Article=201457&Sn=BUSI&IssueID=30255
"The demand for real estate in the Gulf is increasing as foreign investment is becoming more popular due to the sub-prime crisis in the US," Century 21 Bahrain real estate professional Hind Yassine told the GDN.
Monday, December 3, 2007
Sunday, December 2, 2007
The Mortgage Bailout: Moral Hazard
The federal government is working with the financial industry to hammer out a proposal to temporarily freeze interest rates on troubled sub-prime and adjustable rate mortgages. Treasury Secretary Henry Paulson is scheduled to reveal the details of the plan at a national housing conference on Monday,
The major thrust of the proposal would be for lenders to extend for a number of years the lower, introductory teaser rates that were offered on subprime mortgages. Initial details suggest an extension of the lock period to seven years.
Over 2 million of those initial "teaser" rates are scheduled to rise to much higher levels by the end of next year. Many homeowners will not be able to meet the higher payments, likely triggering hundreds of thousands of defaults. Naturally this would dump more unsold homes on an already suffering housing market, pushing home prices down further, further jolting consumer confidence and increasing the probability of a full-blown recession.
Most of the hue and cry in the press recently focuses on the moral hazard of saving homeowners who made very bad choices, few articles focus on the absurdity of bailing out irresponsible banks.
Mortgage aid plan sparks hope and resentment
http://news.yahoo.com/s/nm/20071130/us_nm/usa_housing_hazard_dc
"It's not the government's job to bail them out."
"It feeds into the mentality that the next time you screw up, someone will rescue you."
These statements are even more applicable to the banks than to the stressed homeowners. In reality this plans is about saving the bacon of the banks. Since when does the government actually care about individual homeowners, this entire bailout is about salvaging the entire banking system from a crisis. The concept of moral hazard is even more applicable to bailing out these banks.
Some industry specialists such as Peter Schiff, president of Euro Pacific Capital present a more comprehensive perspective. He recently stated, "The rhetoric is 'We've got to help homeowners,' but the reality is it's designed to help the fat cats, Wall Street. It's bailing out the lenders."
Many historians view the Great Depression would have lasted a mere two years rather than ten if the government had allowed the implosion of the excesses of the financial system to run their downhill course. The intervention of the government to prop up banks and interfere with market activity caused the dismal economic conditions to linger for many years. Only the intervention of WWII caused a turn-around.
At this point it appears that the bail-out plan in some form is a sure lock. Major players in the mortgage industry such as Citigroup, Wells Fargo & Co. and Countrywide are on board. The holders of the CDO notes may cry about reduced interest payments. However CDO holders such as pension and hedge funds face a stark reality either getting paid nothing at all as the entire stack of derivative dominoes tumble or losing a portion of the interest. Most will gladly grab the horns at this point and accept the reduced payments. It is likely that only the lower tranches will suffer and the higher tranches get paid first, leaving only the holders of the lower quality segment of the mortgage derivatives out in the cold.
Maybe this time, the U.S. should simply allow the excesses to be washed out of the financial system. The pain, however sharp, will last for a shorter period of time then a continually cycle of bailouts. Wall Street has a long history of ignoring risks in order to make a quick buck; this leads to constant repetitious cycle of poor financial management. The game ends the same each time; with individuals left out in the cold, the financial firms propped up, bankers flashing big bonuses while every taxpayer is zinged, and another cycle of unnecessary government intervention. Is it time to steer a new course?
Reference:
An earlier post discusses the moral hazard of bailing out Citi
Should Citi Pay for its Mistakes
http://hingefire.blogspot.com/2007/10/should-citi-pay-for-its-mistakes.html
The major thrust of the proposal would be for lenders to extend for a number of years the lower, introductory teaser rates that were offered on subprime mortgages. Initial details suggest an extension of the lock period to seven years.
Over 2 million of those initial "teaser" rates are scheduled to rise to much higher levels by the end of next year. Many homeowners will not be able to meet the higher payments, likely triggering hundreds of thousands of defaults. Naturally this would dump more unsold homes on an already suffering housing market, pushing home prices down further, further jolting consumer confidence and increasing the probability of a full-blown recession.
Most of the hue and cry in the press recently focuses on the moral hazard of saving homeowners who made very bad choices, few articles focus on the absurdity of bailing out irresponsible banks.
Mortgage aid plan sparks hope and resentment
http://news.yahoo.com/s/nm/20071130/us_nm/usa_housing_hazard_dc
"It's not the government's job to bail them out."
"It feeds into the mentality that the next time you screw up, someone will rescue you."
These statements are even more applicable to the banks than to the stressed homeowners. In reality this plans is about saving the bacon of the banks. Since when does the government actually care about individual homeowners, this entire bailout is about salvaging the entire banking system from a crisis. The concept of moral hazard is even more applicable to bailing out these banks.
Some industry specialists such as Peter Schiff, president of Euro Pacific Capital present a more comprehensive perspective. He recently stated, "The rhetoric is 'We've got to help homeowners,' but the reality is it's designed to help the fat cats, Wall Street. It's bailing out the lenders."
Many historians view the Great Depression would have lasted a mere two years rather than ten if the government had allowed the implosion of the excesses of the financial system to run their downhill course. The intervention of the government to prop up banks and interfere with market activity caused the dismal economic conditions to linger for many years. Only the intervention of WWII caused a turn-around.
At this point it appears that the bail-out plan in some form is a sure lock. Major players in the mortgage industry such as Citigroup, Wells Fargo & Co. and Countrywide are on board. The holders of the CDO notes may cry about reduced interest payments. However CDO holders such as pension and hedge funds face a stark reality either getting paid nothing at all as the entire stack of derivative dominoes tumble or losing a portion of the interest. Most will gladly grab the horns at this point and accept the reduced payments. It is likely that only the lower tranches will suffer and the higher tranches get paid first, leaving only the holders of the lower quality segment of the mortgage derivatives out in the cold.
Maybe this time, the U.S. should simply allow the excesses to be washed out of the financial system. The pain, however sharp, will last for a shorter period of time then a continually cycle of bailouts. Wall Street has a long history of ignoring risks in order to make a quick buck; this leads to constant repetitious cycle of poor financial management. The game ends the same each time; with individuals left out in the cold, the financial firms propped up, bankers flashing big bonuses while every taxpayer is zinged, and another cycle of unnecessary government intervention. Is it time to steer a new course?
Reference:
An earlier post discusses the moral hazard of bailing out Citi
Should Citi Pay for its Mistakes
http://hingefire.blogspot.com/2007/10/should-citi-pay-for-its-mistakes.html
Friday, November 30, 2007
Screening to Win: MACD (Moving Average Convergence / Divergence)
The overview below describes one of the common technical indicators – MACD and provides insights on how to utilize it in your stock selection. Hopefully this outline will provide traditional fundamental investors with some solid insight on how to incorporate technical indicators into their screening. The free HingeFire Stock Screener which can be found at http://www.hingefire.com is one of the few tools available that includes a wide selection of fundamental and technical criteria for selecting stocks. Using a combination of fundamental and technical screening is a powerful tool for winning in the market.
Combining MACD Signals
Many investors utilize MACD by combining signals. Some will screen for a bullish condition of the indicator above the signal line and just crossing the centerline. This looks for the confirmation of a bullish trend. Others may look for bullish conditions when the MACD indicator is already above the centerline and has just crossed above the signal line.
Inversely, bearish MACD signals can be combined in a similar manner. Investors may look for setups where the indicator is already below the signal line and just crossed below the centerline; or scan for conditions where MACD is below the center line and just crossed below the signal.
MACD Summary
Many investors also review charts for divergence between MACD and price. This situation usually indicates a significant disconnect in the market, implying that the equity is mis-priced based on market action. Some followers of the MACD indicator also review stock charts for the level of the MACD indicator, searching for key levels such at 0.5, 1, -0.5, and 1, as a pointer for future price action.
However the usual focus for MACD is on the Center Line and Signal Line. When the indicator crosses over these levels it usual serves as an important signal about a change in momentum for a stock. The HingeFire tool can be used to screen for the following significant events for the MACD indicator:
MACD
Moving Average Convergence / Divergence Overview
The MACD indicator was originally developed by Gerald Appel, and is considered to be one of the most reliable center line oscillators. MACD is formed by taking two moving averages, and subtracting the longer timeframe moving average from the shorter. This creates a leading momentum oscillator from underlying moving average indicators which are lagging. Typically a 26 and 12 day EMA are used to form the standard MACD indicator. The selection of these periods appears to provide the best trade-off between the reliability and speed of the MACD signals.
MACD is a centered oscillator; it rises and falls below a Center Line which is the zero level. Generally, territory above the center line is deemed bullish, while the area below is considered bearish. Centered oscillators are useful for identifying strength and weakness, but not overbought or oversold extremes.
A Signal Line is created for the
MACD indicator by plotting a 9 day EMA of the MACD values.
The HingeFire tool provides support to incorporate MACD in your creation of screens for stocks. Users can scan to determine if the MACD indicator is greater than or less than the Center Line or Signal Line, and also establish if the MACD value has just crossed above (JCA) or below (JCB) these thresholds.
Moving Average Convergence / Divergence Overview
The MACD indicator was originally developed by Gerald Appel, and is considered to be one of the most reliable center line oscillators. MACD is formed by taking two moving averages, and subtracting the longer timeframe moving average from the shorter. This creates a leading momentum oscillator from underlying moving average indicators which are lagging. Typically a 26 and 12 day EMA are used to form the standard MACD indicator. The selection of these periods appears to provide the best trade-off between the reliability and speed of the MACD signals.
MACD is a centered oscillator; it rises and falls below a Center Line which is the zero level. Generally, territory above the center line is deemed bullish, while the area below is considered bearish. Centered oscillators are useful for identifying strength and weakness, but not overbought or oversold extremes.
A Signal Line is created for the
MACD indicator by plotting a 9 day EMA of the MACD values.The HingeFire tool provides support to incorporate MACD in your creation of screens for stocks. Users can scan to determine if the MACD indicator is greater than or less than the Center Line or Signal Line, and also establish if the MACD value has just crossed above (JCA) or below (JCB) these thresholds.
How to use MACD in screening
Most investors use MACD to determine if the general trend is bullish or bearish for the stock. Conventionally levels above the centerline are generally considered bullish, and those below bearish. A similar situation holds for the signal line. However most investors are focused on when the MACD indicator crosses these levels indicating a change in trend. The existence of the indicator above or below these levels in itself is not viewed as conclusive regarding the trend for the stock. Most investors screen for bullish or bearish crossovers of the MACD indicator of the Center Line and/or Signal Line.
Most investors use MACD to determine if the general trend is bullish or bearish for the stock. Conventionally levels above the centerline are generally considered bullish, and those below bearish. A similar situation holds for the signal line. However most investors are focused on when the MACD indicator crosses these levels indicating a change in trend. The existence of the indicator above or below these levels in itself is not viewed as conclusive regarding the trend for the stock. Most investors screen for bullish or bearish crossovers of the MACD indicator of the Center Line and/or Signal Line.
Bullish MACD Crossovers
One common bullish scenario is when
the MACD indicator crosses above the Centerline (zero level). The HingeFire screener supports looking for these crossovers. A screen in late October found Abbott Labs (ABT) when the MACD indicator (blue line) crosses over the Center Line. This was shortly after Abbott also crossed the red signal line. Since this time ABT has continued to generally increase in price.
One common bullish scenario is when
the MACD indicator crosses above the Centerline (zero level). The HingeFire screener supports looking for these crossovers. A screen in late October found Abbott Labs (ABT) when the MACD indicator (blue line) crosses over the Center Line. This was shortly after Abbott also crossed the red signal line. Since this time ABT has continued to generally increase in price.As shown above, another bullish indicator is when the MACD Indicator crosses the Signal Line. This event may lead or lag the crossing of the centerline. Many investors focus on signal line crossings to time their entry or exit points. Many times the cross above the signal line indicates a change in trend.
Conagra Inc. (CAG) recently 
reversed a downtrend when the MACD indicator (blue) rose above the Signal Line (red). This occurred while the MACD indicator was still well below the centerline, providing investors an early signal to take a long position. The HingeFire screener discovered this setup when screen for the MACD indicator JCA the signal line earlier this week.
reversed a downtrend when the MACD indicator (blue) rose above the Signal Line (red). This occurred while the MACD indicator was still well below the centerline, providing investors an early signal to take a long position. The HingeFire screener discovered this setup when screen for the MACD indicator JCA the signal line earlier this week. Bearish MACD Crossovers
One common bearish indicator is when MACD crosses below the centerline. This confirms that the trend has shifted from bullish to bearish. The previous history of MACD on a chart many times serves to underline the intensity of a cross below the centerline. A situation where the indicator dives from a high positive level down below the centerline indicates sharp downside price momentum. Scenarios where the MACD wobbles below the center line after several recent crosses usually indicates less conviction in bearish potential.
Tennant Co (TNC) had
its MACD cross below the Center Line today. Despite entering bearish territory, the deficit of impetus in the indicator as it retraces below zero demonstrates a lack of conviction in the signal. While the HingeFire stock screener has picked up this cross below the Center Line, many traders would review the chart and search for other MACD cross below opportunities. This underlines the point that a screener is a tool that is focused on providing potential candidates, it is important for investors to do additional fundamental and chart research when selecting their stocks.
One common bearish indicator is when MACD crosses below the centerline. This confirms that the trend has shifted from bullish to bearish. The previous history of MACD on a chart many times serves to underline the intensity of a cross below the centerline. A situation where the indicator dives from a high positive level down below the centerline indicates sharp downside price momentum. Scenarios where the MACD wobbles below the center line after several recent crosses usually indicates less conviction in bearish potential.
Tennant Co (TNC) had
its MACD cross below the Center Line today. Despite entering bearish territory, the deficit of impetus in the indicator as it retraces below zero demonstrates a lack of conviction in the signal. While the HingeFire stock screener has picked up this cross below the Center Line, many traders would review the chart and search for other MACD cross below opportunities. This underlines the point that a screener is a tool that is focused on providing potential candidates, it is important for investors to do additional fundamental and chart research when selecting their stocks. When the MACD Indicator crosses below the Signal Line it is usually a start of a bearish trend. The HingeFire screener found AK Steel Holding Corp (AKS) in a scan of MACD just cros
sed below (JCB) the signal line in late October. As the chart demonstrates AKS has continued to drop in price since this crossover. Many investors view that a MACD cross below is a good indicator of the start of a bearish trend, while an additional cross below the centerline serves as confirmation.
sed below (JCB) the signal line in late October. As the chart demonstrates AKS has continued to drop in price since this crossover. Many investors view that a MACD cross below is a good indicator of the start of a bearish trend, while an additional cross below the centerline serves as confirmation.Combining MACD Signals
Many investors utilize MACD by combining signals. Some will screen for a bullish condition of the indicator above the signal line and just crossing the centerline. This looks for the confirmation of a bullish trend. Others may look for bullish conditions when the MACD indicator is already above the centerline and has just crossed above the signal line.
Inversely, bearish MACD signals can be combined in a similar manner. Investors may look for setups where the indicator is already below the signal line and just crossed below the centerline; or scan for conditions where MACD is below the center line and just crossed below the signal.
MACD Summary
Many investors also review charts for divergence between MACD and price. This situation usually indicates a significant disconnect in the market, implying that the equity is mis-priced based on market action. Some followers of the MACD indicator also review stock charts for the level of the MACD indicator, searching for key levels such at 0.5, 1, -0.5, and 1, as a pointer for future price action.
However the usual focus for MACD is on the Center Line and Signal Line. When the indicator crosses over these levels it usual serves as an important signal about a change in momentum for a stock. The HingeFire tool can be used to screen for the following significant events for the MACD indicator:
- Bullish Crossovers of the Centerline
- Bullish Crossovers of the Signal Line
- Bearish Crossovers of the Center Line
- Bearish Crossovers of the Signal Line
- Combinations of Bullish or Bearish MACD signals
Combining technical indicators such as Moving Average Convergence / Divergence indicator with commonly used fundamental criteria when selecting your investments helps put the market edge in your corner. The MACD support in the HingeFire Stock Screener adds a powerful tool for determining the momentum in the market so you can enter or exit your investments at the correct time.
Thursday, November 29, 2007
Time to Renovate
There is a silver lining to the housing crisis. Contractors are being more realistic about your home improvement projects.
For a while now, I have been looking to get a room in our attic finished. The room is about 20 by 16 in size, and does not require anything fancy; no bath, upgraded features, or anything very expensive. About a year ago, I put the project out for bid and most of the contractors did not even call back. The contractors that did respond provided outrageous quotes and did not even seem to be reliable.
Fast forward the clock to today, I recently started to explore this project again. The return calls are much quicker and the price estimates down more than 30% from the outrageous expectations from a year ago.
This phenomenon appears to be common and nationwide. It appears the time is now to get moving on that home renovation project which your spouse yearns for.
The Upside to the Downturn
Contractors Return Calls, Materials Cost Less; Mr. Bowes's Half-Price Renovation
http://finance.yahoo.com/real-estate/article/103942/The-Upside-to-the-Downturn
For a while now, I have been looking to get a room in our attic finished. The room is about 20 by 16 in size, and does not require anything fancy; no bath, upgraded features, or anything very expensive. About a year ago, I put the project out for bid and most of the contractors did not even call back. The contractors that did respond provided outrageous quotes and did not even seem to be reliable.
Fast forward the clock to today, I recently started to explore this project again. The return calls are much quicker and the price estimates down more than 30% from the outrageous expectations from a year ago.
This phenomenon appears to be common and nationwide. It appears the time is now to get moving on that home renovation project which your spouse yearns for.
The Upside to the Downturn
Contractors Return Calls, Materials Cost Less; Mr. Bowes's Half-Price Renovation
http://finance.yahoo.com/real-estate/article/103942/The-Upside-to-the-Downturn
U.K. Housing Update
Press reports came out today that emphasize the demise of the U.K. housing market. The cost of homes dived 0.8% from October. Banks have cut back on loans with the volume dropping significantly from September. The Bank of England now views the banking crisis as the top concern according to a statement from Governor Mervyn King while offering emergency funds to impacted institutions today.
U.K. Home Prices Drop Most Since 1995, Loans Decline
http://www.bloomberg.com/apps/news?pid=20601087&sid=a41rAenmuzDU&refer=worldwide
"There are clearer signs that the slowdown in the housing market is gathering pace,'' central bank policy maker Rachel Lomax said on Nov. 22."
King Says Market Rate Increase Caused by Bank Capital Concern
http://www.bloomberg.com/apps/news?pid=20601087&sid=a6zhCIZAiVXk&refer=worldwide
See the earlier U.K. Housing post:
http://hingefire.blogspot.com/2007/11/international-housing-home-prices-drop.html
U.K. Home Prices Drop Most Since 1995, Loans Decline
http://www.bloomberg.com/apps/news?pid=20601087&sid=a41rAenmuzDU&refer=worldwide
"There are clearer signs that the slowdown in the housing market is gathering pace,'' central bank policy maker Rachel Lomax said on Nov. 22."
King Says Market Rate Increase Caused by Bank Capital Concern
http://www.bloomberg.com/apps/news?pid=20601087&sid=a6zhCIZAiVXk&refer=worldwide
See the earlier U.K. Housing post:
http://hingefire.blogspot.com/2007/11/international-housing-home-prices-drop.html
Wednesday, November 28, 2007
Screening to Win: Fast and Slow Stochastic
This is the third installment in the series "Screening to Win". This article discusses utilizing the Stochastics technical indicator in your screening. The earlier commentary about Moving Averages and RSI can be found at:
Moving Averages
http://hingefire.blogspot.com/2007/11/screening-to-win-moving-averages.html
RSI
http://hingefire.blogspot.com/2007/11/screening-to-win-rsi-relative-strength.html
The overview below describes one of the common technical indicators – Stochastics and provides insights on how to utilize it in your stock selection. Hopefully this outline will provide traditional fundamental investors with some solid insight on how to incorporate technical indicators into their screening. The free HingeFire Stock Screener which can be found at http://www.hingefire.com is one of the few tools available that includes a wide selection of fundamental and technical criteria for selecting stocks. Using a combination of fundamental and technical screening is a powerful tool for winning in the market.
Slow and Fast Stochastic
Slow and Fast Stochastic Overview
The Stochastic indicator was originally developed by George C. Lane in the late 1950s and has gained wide-spread popularity since this time. The Stochastic indicator is a momentum oscillator that reveals the location of the current close relative to the high-low price range over a defined number of periods. Generally, levels that are near the top of the range indicate accumulation and those near the bottom of the range indicate distribution.
Stochastic oscillators normally utilize a 14 day formation period and a three day smoothing filter. The indicator is presented as a percentage running from 0 to 100. Stochastic indicators normally have two sub-components; %K line which is the unsmoothed relationship of the price to the highs and lows over a 14 day period, and %D line which applies a 3 days smoothing filter to this data.
There are two common stochastic oscillators; fast and slow. The fast stochastic oscillator adjusts more quickly then the slow stochastic. This is understandable because the slow stochastic indicator is normally created by applying an additional 3 day filter to the %D information associated with the faster indicator. As expected, the fast stochastic oscillator is more prone to whip-saws and quicker movement then its slower cousin.
The HingeFire stock screening t
ool provides support for both Slow and Fast Stochastic indicators. Support for the 20 (oversold) and 80 (overbought) levels is incorporated. Users can scan to determine if the stochastic reading is greater than or less than a particular level, and also establish if the fast or slow stochastic just crossed above (JCA) or below (JCB) these thresholds.
How to use Stochastics in screening
Most investors utilize stochastics to identify oversold and overbought conditions. Stochastic levels below 20 are generally considered oversold and above 80 are considered overbought. However a reading below 20 is not necessarily bullish, nor a reading above 80 bearish. Stochastic indicators can remain at these levels for lengthy periods of time. It is more important to focus on situations where the stochastic crosses below 80 indicating an exit from an overbought condition, or crosses above 20 indicating an egress from an oversold condition.
Both the %K and %D for stocha
stic indicators are normally displayed on charts. The recent chart of 3M Corp (MMM) shows an example of a slow stochastic that recently just crossed above (JCA) the 20 level. This is one of the stocks recently found using the HingeFire tool to screen for stocks whose slow stochastic just crossed above this level. Normally this is taken as a sign that the selling pressure is exhausted and the stock price is poised to rise.
As a point of interest notice the earlier price drops in the 3M chart that occurred when the slow stochastic level fell below 80. The drop below 80 indicates an exhaustion in buying and commonly leads to either a brief retrenchment or more significant drop in price
A fairly volatile stock Amerco (
UHAL) recently had its fast stochastic just cross below (JCB) the 80 level. This cross below was followed by a price drop of more then $8 for the stock. Many traders utilize fast stochastic to get in on moves early.
Note the lag of the slow stochastic as compared to the fast stochastic for the volatile stock in the diagram above (both are plotted). A trader using the fast stochastic would have caught the recent move down near the peak; while an investor using the slow stochastic would have gotten in on this move much later. This is a solid demonstration of the difference between the two indicators; note that the slow stochastic is still a very reliable indicator for timing buys and sells for long term investors focused on non-volatile instruments.
It is generally deemed that investors should use a fast stochastic for the timing of medium term trades with volatile stocks. The slow stochastic is more useful to determine entries and exits for longer term investments, or if you find that the fast stochastic causes you to over-trade.
There is one school of thought that states that investors should look at charts and focus on the divergence between price and stochastic level near oversold and overbought levels. Many times the second time that the stochastic indicator crosses out of an overbought or oversold condition in a short period of time is deemed a better indication of final exhaustion in buying or selling.
In summary, many investors use the HingeFire tool to screen for the following situations with Stochastics.
Moving Averages
http://hingefire.blogspot.com/2007/11/screening-to-win-moving-averages.html
RSI
http://hingefire.blogspot.com/2007/11/screening-to-win-rsi-relative-strength.html
The overview below describes one of the common technical indicators – Stochastics and provides insights on how to utilize it in your stock selection. Hopefully this outline will provide traditional fundamental investors with some solid insight on how to incorporate technical indicators into their screening. The free HingeFire Stock Screener which can be found at http://www.hingefire.com is one of the few tools available that includes a wide selection of fundamental and technical criteria for selecting stocks. Using a combination of fundamental and technical screening is a powerful tool for winning in the market.
Slow and Fast Stochastic
Slow and Fast Stochastic Overview
The Stochastic indicator was originally developed by George C. Lane in the late 1950s and has gained wide-spread popularity since this time. The Stochastic indicator is a momentum oscillator that reveals the location of the current close relative to the high-low price range over a defined number of periods. Generally, levels that are near the top of the range indicate accumulation and those near the bottom of the range indicate distribution.
Stochastic oscillators normally utilize a 14 day formation period and a three day smoothing filter. The indicator is presented as a percentage running from 0 to 100. Stochastic indicators normally have two sub-components; %K line which is the unsmoothed relationship of the price to the highs and lows over a 14 day period, and %D line which applies a 3 days smoothing filter to this data.
There are two common stochastic oscillators; fast and slow. The fast stochastic oscillator adjusts more quickly then the slow stochastic. This is understandable because the slow stochastic indicator is normally created by applying an additional 3 day filter to the %D information associated with the faster indicator. As expected, the fast stochastic oscillator is more prone to whip-saws and quicker movement then its slower cousin.
The HingeFire stock screening t
ool provides support for both Slow and Fast Stochastic indicators. Support for the 20 (oversold) and 80 (overbought) levels is incorporated. Users can scan to determine if the stochastic reading is greater than or less than a particular level, and also establish if the fast or slow stochastic just crossed above (JCA) or below (JCB) these thresholds.How to use Stochastics in screening
Most investors utilize stochastics to identify oversold and overbought conditions. Stochastic levels below 20 are generally considered oversold and above 80 are considered overbought. However a reading below 20 is not necessarily bullish, nor a reading above 80 bearish. Stochastic indicators can remain at these levels for lengthy periods of time. It is more important to focus on situations where the stochastic crosses below 80 indicating an exit from an overbought condition, or crosses above 20 indicating an egress from an oversold condition.
Both the %K and %D for stocha
stic indicators are normally displayed on charts. The recent chart of 3M Corp (MMM) shows an example of a slow stochastic that recently just crossed above (JCA) the 20 level. This is one of the stocks recently found using the HingeFire tool to screen for stocks whose slow stochastic just crossed above this level. Normally this is taken as a sign that the selling pressure is exhausted and the stock price is poised to rise.As a point of interest notice the earlier price drops in the 3M chart that occurred when the slow stochastic level fell below 80. The drop below 80 indicates an exhaustion in buying and commonly leads to either a brief retrenchment or more significant drop in price
A fairly volatile stock Amerco (
UHAL) recently had its fast stochastic just cross below (JCB) the 80 level. This cross below was followed by a price drop of more then $8 for the stock. Many traders utilize fast stochastic to get in on moves early.Note the lag of the slow stochastic as compared to the fast stochastic for the volatile stock in the diagram above (both are plotted). A trader using the fast stochastic would have caught the recent move down near the peak; while an investor using the slow stochastic would have gotten in on this move much later. This is a solid demonstration of the difference between the two indicators; note that the slow stochastic is still a very reliable indicator for timing buys and sells for long term investors focused on non-volatile instruments.
It is generally deemed that investors should use a fast stochastic for the timing of medium term trades with volatile stocks. The slow stochastic is more useful to determine entries and exits for longer term investments, or if you find that the fast stochastic causes you to over-trade.
There is one school of thought that states that investors should look at charts and focus on the divergence between price and stochastic level near oversold and overbought levels. Many times the second time that the stochastic indicator crosses out of an overbought or oversold condition in a short period of time is deemed a better indication of final exhaustion in buying or selling.
In summary, many investors use the HingeFire tool to screen for the following situations with Stochastics.
- Break Above Oversold with Slow Stochastic – Screening for stocks that JCA the 20 level as entry points for long term investments on non-volatile stocks.
- Break Below Overbought with Slow Stochastic – Screening for stocks that JCB the 80 level as exit points for long term investments on non-volatile stocks, or possibly to short.
- Break Above Oversold with Fast Stochastic – Screening for stocks that JCA the 20 level as a long entry points for trades on more volatile stocks.
- Break Below Overbought with Fast Stochastic – Screening for stocks that JCB the 80 level as an entry point to get short.
Combining technical indicators such as Stochastics with commonly used fundamental criteria when selecting your investments helps put the market edge in your corner. The support for Slow and Fast Stochastic indicators in the HingeFire Stock Screener adds a powerful tool for timing your transactions.
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