Applying Full Stochastics to Bullish Continuation Patterns
A buy signal, especially coming from below the 20 level, is a strong indication that the stock is going to trade higher. But the buy signal can form at any level in Full Stochastics when trading bullish continuation patterns. A crossover from below 20 is just as valid as a crossover that occurs at 80.
A buy signal in Full Stochastics combined with the formation of a bullish continuation pattern combines to give a very strong signal that a stock is going to move higher.
The buy signal in the Full Stochastics serves as a leading indicator to the completion of the bullish continuation pattern. This helps to create an earlier entry point, one in which risk can be managed acutely with a tight stop loss.
Figure 11.3
Example:
Recall the bullish pennant that formed in shares of Chipotle Mexican Grill (CMG) as shown in Figure 11.3. The bullish pennant was confirmed when the stock broke above the downward sloping resistance line at around $108. But notice how the Full Stochastics gave a buy signal several days before CMG confirmed the bullish pennant. The buy signal came when CMG was trading around $103. This offered a much better entry point ahead of the breakout.
Figure 11.4
Example:
The bullish flag that formed in the United States Oil Fund (USO) in Figure 11.4 offers another example of how a buy signal in Full Stochastics can serve as a leading indication to confirmation of the pattern. The Full Stochastics crossed over, generating a buy signal, a few days before the USO broke out from its bullish flag.
The crossover served two purposes in this example. First, it would have alerted traders to a pending breakout, even offering a better entry point near $53 as opposed to $54. Second, the buy signal in Full Stochastics added strength to the breakout from the bullish flag. Also, note the relatively oversold level of near 20 at which the buy signal occurred in the Full Stochastics.
It’s almost as if the USO was a balloon being held under water. Once the buy signal occurred, the USO erupted above the surface of the bullish flag and then steadily drifted higher.
Learning and then applying these subtleties can lead to amazing results in the market.