Last week we wrote about using Stochastics with moving averages to help on the selection of stocks either as new sell or buy ideas. Lately, we are looking at potentially new buy ideas as most stocks are reaching oversold territory instead of overbought. Many in fact are just getting more oversold.
In terms of using Stochastics and moving averages to pick shorts, that is a whole other discussion, and we will pen on that after the next up cycle completes its run. Understand that most clients we advise are traditional long managers who may use an occasional hedge to protect on the downside.
For now, this has become an ugly market since SPY has failed at the 415 level the week after Memorial Day Weekend and stocks are failing below the 380 level on SPY which we thought had the potential to hold. Longer term we still think that SPY can bottom by late June or early July but it may be at a lower level which validates the discussion below and its theme. No one is a perfect timer.
As you may recall, when Stochastics get oversold (move under 20) and then move back above, the two moving averages we look at, the 5 day and the 20 day, are still in a downtrend with the 5 day yet to turn up. Shortly after the Stochastic moves back above 20 we would expect the 5 day to cross back above the 20 day if the signal is going to work.
Sometimes however the Stochastic can stay oversold for an extended period of time, a month or two. If this happens, then the trend is down and prices will continue to fall until we get a stochastic buy signal where the moving averages cross. We are using another strategy in this environment. This strategy involves “dollar cost averaging”.