Quite possibly the biggest question on the minds of investors today is: when is it safe to jump back in for the long term? Active traders know that timing is everything and waiting for that specific moment when a technical turnaround indicates a safe return is worth it. It's time long-term investors add a little technical wizardry of their own. While strong fundamentals can help us to feel better about a stock, the fact remains that no one company was safe during the recent plunging markets. While the technical duo of MACD and stochastic oscillator are providing some entry point for stocks, which we will talk about below, but before we dive into the analysis let's take a look at what one should be looking for when using this pair of indicators.
Interpretation and Use
When two popular indicators are paired and then synchronized to highlight an entry point, we are able to benefit from the objective signal that is generated. Such is the case of the stochastic and the MACD. The indicator team 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 we've seen 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 MACD bullish crossover occurs when the MACD line is of a greater value than the 9-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
|Teva Pharmaceutical Industries
|The Travelers Companies
By taking a look at the chart of 3M, you can see that the MACD indicator and stochastic oscillator crossed above their respective signal lines at the same moment. This simultaneous crossover is a technical signal that suggests the bulls are moving into control. Equally important was the price move above 50-day moving average suggesting that when this stock breaks through $67.00, it will be clear sailing on the short term. Active investors should note the resistance at the $70.00 mark as it will also be the approximate value of the 200 day moving average in few days. Sometimes it is better to take a short term profit and re-enter a position when it clears resistance apparent in the charts.
Also, the 21 day moving average is crossed above the 50-day moving average. This moving average cross will add to the stock's momentum but be careful as this moving average push may only last five days, after that the stock price will likely succumb to general market conditions.
TEVA Pharmaceutical Industries
For the past month, Teva Pharmaceutical has been struggling to move upward and you will notice that now the 21-day moving average has crossed above the 50-day moving average. On Friday, we were able to witness the double crossover of the MACD and stochastics above their respective signal lines confirming the stock is establishing support. Also check out the solid trading volumes over the past 10 days. Active investors can look to the stock to now break out of the recent downtrend providing its lows can get above $44.00 and expect a slight challenge from the 200-day moving average currently at $44.92.
The Stochastic and MACD "double-cross" strategy allows for the trader to change the intervals finding optimal and consistent entry points 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 averages. Also, you might look to see if the RSI is above 60, as this helps confirm price momentum in turbulent markets.
While it is true that the stochastic and MACD function on different technical premises, and that the MACD is definitely a more reliable option as a sole trading indicator, it is to an investor's benefit to take advantage of what these two well-paired indicators have to offer. Whether it's during a time of plummeting markets or a time of slowly returning to status quo, the MACD and Stochastic as a duo are considered to be a versatile and reliable option.
For further reading, see MACD and Stochastic: A Double-Cross Strategy.