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Greetings, Pro-fundity team members -
03-07-03

At the bottom of the Guidepost, a full listing of this weeks picks are shown, in addition to the Charts via the Pick-link.

As a benefit of membership, you have access to all Guideposts (including Archived GP's) and Picks. If you miss a week or two for whatever reason, you will be able to go into the Historical Guidepost link to catch up with both the weekly guidepost and the 30 picks made for the week.

Greetings, fellow Pro-fundity team members

1. That’s a pretty good technical definition, but a little tough to follow. Actually, these terms (overbought, oversold - OB/OS) are a bit fuzzy. Overbought means a stock price has risen too far, too fast, and will likely correct before too long. Oversold is, of course, just the opposite, a stock that has fallen too far, too fast. This seems a chance to find entry and exit points. Together these two conditions provide the cycle we treasure with rolling stocks, from support on the bottom to resistance at the top. A popular way to “measure” this condition is the Stochastics indicator (see our Stochastic tutorial link).

2. The following chart is an example of a recent pick (1/24/03, NEOF) with its Stochastic shown in the middle window.
   
   Fig. 1 NEOF, with marker on the pick date.

3. The “Stochastics” method suggests we buy when the Red crosses up through the Blue, and to sell at the top where Red crossed down through Blue. The two horizontal gray lines in the window are 20% and 80% reference levels, above 80% overbought, below 20% oversold. If we followed the rules, we wouldn’t buy on the date of the pick but several days later, when the red crossed up through the blue. This would be a bit late, missing the best entry. Point: The stochastic indicator is derived from the price pattern. The price doesn’t follow the stochastics. Therefore, the stochastics lines will lag the price action. It takes skill (spelled experience) to correctly use the stochastics indicator to select entry and exit points.

4. The following chart shows another recent pick with the stochastics indicator in the middle window. Using only the stochastics, how could we take advantage of the price volatility with entries and exits? This points out the trouble we might get into relying only on this OB/OS indicator.
   
   Fig. 2 LII, with marker on the pick date.

5. Finally, the next chart (picked a week earlier) gives a better entry, but still slightly behind the price pattern. A point of fact is evident from these three examples; Stochastics work better with rolling patterns, those in a general sideways direction. Less well when the pattern is in either an uptrend or downtrend.
   
   Fig. 3 MOGN, with marker on the pick date.

6. We’ve defined overbought and oversold with some examples. It is still just a bit fuzzy, but we can make a sound statement on their use: Do not make decisions based on these "measurements" alone. A stock can move into an oversold condition and stay oversold for a long time while it continues to fall. The same for an overbought stock. These overextended conditions merely set the stage for either a rally or a decline. For an actual trigger, we need more evidence (like MACD, or Wilder's RSI, or a heavy-volume price breakout, etc.). Stochastics give us great information in concert with several other indicators. Our goal is to find consensus! We must remain open, and always use stops!!!
   03-07-03 Pick Selection:

   Main Picks:
   AVEA,DRL,GW,HME,MYG,REM,RMD,SCS,SHU,TSA
   Breakouts:
   ALGN,AMI,AVCT,EQY,POG,PPP,PVX,SNH,SSYS,WRI
   QuickPicks:
   ABRX,AHMH,ALN,AMMD,CNCT,CTV,DRTE,FINL,NOVN,RYAN

   Pick Performance:

   We use the S&P 500 as a benchmark, the most common proxy for market action. The average of both pick and S&P 500 performance are compared on each date on the chart (average of 7-day, 14-day, and 21-day performance).

   
   

   

   Average Pick vs. Market (S&P-500) Performance

   The time frame used for the comparison is in line with our swing-trading focus. We generally get in and out of positions during this time. Our picks are chosen with sufficient volatility to suit this purpose.

   For detail and followup on Pro-fundity Tradescape,
   find the link on "Advanced Trading Tools" on the home page.

   

   
   
   
   
   

   
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