Applying Full Stochastics to Bearish Continuation Patterns
A sell signal, especially coming from above the 80 level, is a strong indication that the stock is going to trade lower. But the sell signal can form at any level in Full Stochastics when trading bearish continuation patterns. A crossover from above 80 is just as valid as a crossover that occurs at 20.
A sell signal in Full Stochastics combined with the formation of a bearish continuation pattern combines to give a very strong signal that a stock is going to move lower.
The sell signal in the Full Stochastics serves as a leading indicator to the completion of the bearish continuation pattern. This helps to create an earlier entry point, one in which risk can be managed acutely with a tight stop loss.
Figure 11.5
Example:
Recall the long-term bearish triangle that formed in shares of Alcatel-Lucent (ALU) as shown in Figure 11.5. The stock confirmed the bearish triangle when it broke down below the $12 level. But look at where the Full Stochastics generated a sell signal. ALU was trading at $14 when the sell signal occurred. That’s not a big dollar amount. But considering the low price of the stock, the entry point near $14 is a huge improvement.
Figure 11.6
Example:
The bullish flag that formed in shares of Brunswick (BC) resulted in a great continuation of the bearish trend as shown in Figure 11.6. The stock broke down below the $30 level, confirming the bearish flag that had formed over the course of 13 months.
The sell signal in the Full Stochastics alerted traders to a breakdown from the bearish flag a full month before the actual breakdown. The sell signal in Full Stochastics occurred when BC was trading near $33.
The sell signal in the indicator not only alerted traders to an earlier entry point, but it also added conviction to the breakdown below support. The two signals (sell signal and breakdown) combined to form a strong indication that BC would head lower.
The stock did, indeed, head much lower!