Two Indicators Are Better Than One

By Glenda Dowie | September 22, 2008 AAA

The U.S. bailout of financial institutions to a tune of $700 billion is enough to make the most hardened trader cringe. With an upcoming leadership change and the skirting of possibly one of the worst financial crises since the 1930s, everyone is wondering "what's next?"

It helps to know that stocks like Albany Molecular Research (Nasdaq:AMRI), Macrovision Solutions (Nasdaq:MVSN) and Westlake Chemical (NYSE:WLK) are experiencing some positive movement upward that can be detected by a scan. Using the combination of two popular technical indicators makes it easy for an active trader to identify those stocks experiencing a true breakout from a downtrend offering some tremendous upside to the trader, especially now as markets themselves seem to be turning on recent news.

Interpretation and Use
When two popular indicators are paired and then synchronized to highlight an entry point, we are able to see a perfect match in action. Such is the case of the Stochastic Oscillator and the MACD (Moving Average Convergence Divergence), the indicator team that works well due to the Stochastic's ability to compare a stock's closing price to its price range while the MACD is a formation of two moving averages diverging and converging with each other. This dynamic combination is highly effective for timing your entry - either from a recent bottom or during a pullback in a long upward trend.

This scan highlights how a bullish MACD crossover can work with a bullish Stochastic crossover to provide confirmation of a trade opportunity, for both active traders and investors. The bullish MACD crossover occurs when the MACD line is of a greater value than the nine-day EMA; the Stochastic is bullish when %K passes up through the %D. Now look for the crossovers to occur within two days of each other, and, ideally, the Stochastic crossover point is below 50 for a longer ride.

While each trader must separately set personal preferences like market, price range, volume, etc., we included potential "interval" settings we used: For the Stochastic set at [14, 4, 4] and the MACD at [5, 26, 9].

Recent Scan Results:

Company Market Cap
Albany Molecular Research
(Nasdaq:AMRI)
600M
Camden Property Trust
(NYSE:CPT)
2.75B
Macrovision Solutions
(Nasdaq:MVSN)
1.81B
Nicor
(NYSE:GAS)
2.19B
Westlake Chemical
(NYSE:WLK)
1.40B

Albany Molecular Research
By taking a look at the chart of Albany Molecular Research (Figure 1) from Friday, you'll notice that the MACD indicator and Stochastic oscillator are crossing above their respective signal lines at the same moment like a pair of synchronized swimmers (shown by the blue circles). This simultaneous crossover is a technical signal that suggests the bulls are in control of the direction. A small word of caution on this pick is that the average volume is below 500,000 shares per day, which could be a concern for some short-term traders because it suggests that this stock does not offer the liquidity of a more widely followed company. Low volume stocks are more susceptible to short-term price fluctuations.

You'll also notice that the Stochastic crossover occurred around 55 with ideals being below 50. The new 52-week high combined with the Stochastic/MACD crossover suggests that this stock has room to go to new highs, but given the relatively low average volume, it wouldn't be surprising to see risk-adverse traders remain on the sidelines for now.

Figure 1. Chart of Albany Molecular Research

Macrovision
Judging by the lows on the three-month chart of Macrovision (Figure 2), you can see that it has been struggling upward, and it was only recently that the stock started trading above its 200 day moving average. On Friday, the price was able to leap past and then close above its previous resistance of $17.55 (shown by the black trendline), creating a new recent high. It is also worth mentioning that it has been trading on solid trading volumes in September averaging above two million shares per day. Finally, traders can look to the stock to break out of the swing-trade pattern that it has been for the past several months.

Breaking a new high combined with the MACD/Stochastic crossovers will be used by traders as confirmation that makes this stock attractive for a longer term play. I like that the Stochastic cross occurred around 51 and would remain bullish until the %D Stochastic crosses above 80 into overbought territory. Watch for some resistance at the $21.00 mark before any return to prices in 2007.

Figure 2. Three-month chart of Macrovision

Trader's Tip
The Stochastic and MACD Double-Cross-Up scan allows for the trader to change the intervals finding optimal and consistent entry points, also allowing it to be adjusted for both active trader and investor needs. It is safer to enter these picks when they are trading above their 200-day moving average.

Wrapping It Up
We know that separately, the Stochastic Oscillator and MACD function on different technical premises. Compared to the Stochastic, which ignores market jolts, the MACD is a more reliable option as a sole trading indicator. However, just like two heads, two indicators are usually better than one! Due to recent market vacillations, traders are looking for something concrete that maintains a little bit of stability. While stocks will still experience peaks and valleys, there is some relief in knowing that the Stochastic and MACD are an ideal pairing that can provide for a more effective trading experience.

For further reading see: A primer on the MACD and Getting To Know The Oscillators: Stochastics.

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