George Lane’s Stochastic Oscillator can foreshadow reversals well before price knows it, let alone price following traders.
Dr. Lane was a fairly smart guy to recognize the predictive nature of this measurement complimented by the Law of Large Numbers as it relates to markets:
the Stochastic Oscillator
%K = (C−L14) / (H14−L14) × 100 where:
C = The most recent closing price; L14 = The lowest price traded of the 14 previous trading sessions; H14 = The highest price traded during the same14-day period;
%K = The current value of the stochastic indicator
TheWhooph: In the sample chart above, the faster RED stochastic (signal line) juts in to the slower BLACK) line. This is a warning or precursor of change. Then upon the equity or stock’s continuance of its rally, price inks a higher high suggesting no evidence of price weakness whatsoever!
However, Dr. Lane’s Stochastic disagrees. The signal line of the Stochastic begins to lag or fails to catch up to the higher price action indicating a change in Average 14-period momentum. The math formula for Stochastic effectively draws an “alligator snout” profile or what the Whooph calls Close n Parallel, a form of Divergence as shown in the header image above. The circled portion of Stochastic shows the tell-tail: even as price registers a higher high, the Stochastic faster RED signal line hugs the BLACK and is unable to pull away from the slower BLACK line, suggesting weakness. Who would know?
In fact, momentum begins to suffer WELL BEFORE price action even “knows it”. This is true especially if you’re NOT gauging change in momentum against the prior average momentum 14-28 days ago. And who would be?!
What percentage of traders do this or even know what relative highs to look at over a greater than 14-day period, when trying to gauge an impending swing in price let alone a swing reversal or correction or crash?
Is it even possible? Plenty of criticism spews from critics in caustic, sarcastic tones, suggesting market price action is completely random and unpredictable outside of the news or earnings. ( Ha!…really? )
So, which is it? Is a market reversal predictable or not? This very same principle was already on display well before Thursday, February 20th, 2020. Not just days, but WEEKS before the crash.
Can you see it?
©️theWhooph 2023
