Crossovers Normally, the faster
%Kline changes direction sooner than the %D line.
This means that the crossover will occur before the
%D line has reversed direction. When the %D line reverses direction
first, a slow, stable change of direction is indicated,
and %D is regarded as a more reliable signal.
Divergence Failure
An important
indication of a possible change in trend arises when the
%K line crosses the %D line, moves back to
test its extreme level, and fails to cross the %D
line.
Reverse Divergence
Occasionally,
during an uptrend, the %D line will make a lower
low, which is associated with a higher low in the price. This is a bearish omen, and
conventional wisdom suggests looking for a selling
opportunity on the next rally. This condition is
sometimes referred to as a bear setup. A bull
setup develops at the end of a downtrend.
Extremes
Occasionally, the %K value reaches the extreme
of 100 or O. This indicates that a very powerful
move is underway, since the price is consistently
closing near its high or low. If a successful test
of this extreme occurs following a pullback, it is
usually regarded as an excellent entry point.
H
inges When either
the %Kline or the %D line experiences a
slowdown in velocity, indicated by a flattening
line, the indication is usually that a reversal
will take place in the next period.
D
ivergences The
stochastic indicator often sets up positive and
negative divergences in a similar manner to other
oscillators. Buy and sell alerts are triggered when
the %K line crosses %D after a
divergence has taken place.
S
lowed Stochastic
Indicator It is also possible to extend the calculation
in order to invoke a slowed version of stochastic
indicators. In this instance, the %K line is
replaced with the %D line, and another MA is
calculated for the %D. Many technicians argue
that this modified stochastic version gives more
accurate signals.
Momentum Indicator - Stochastic
Indicators Interpretation
