Applying Full Stochastics to Bullish Reversal Patterns
Look for oversold readings in Full Stochastics when trading bullish reversal patterns. Remember that oversold, as defined by Full Stochastics, is below 20.
Bullish reversal patterns and oversold readings go hand in hand. Bullish reversal patterns predict the reversal of long-lasting bearish trends. Naturally, stocks should be oversold after long bearish trends.
A buy signal in Full Stochastics combined with the formation of a bullish reversal pattern combines to give a very strong signal that a stock is going to reverse its bearish trend and move higher. Furthermore, the buy signal in Full Stochastics helps to spot earlier entry points, which can be of tremendous benefit when managing the volatility that usually accompanies a reversal of trend.
Figure 11.7
Example:
Shares of Home Depot (HD) formed a triple bottom at the $32 level as shown in Figure 11.7. The stock eventually broke above the horizontal resistance at $34 in spectacular fashion. The stock zoomed higher in one day up to $35.50 after confirming the triple bottom.
Well ahead of the confirmation of the triple bottom, Full Stochastics generated buy signal as HD rebounded from the $32 level for the third time, thus forming the triple bottom. The Full Stochastics generated a buy signal in HD at about $32.50. Notice the level in Full Stochastics as which the crossover occurred. It was from below 20, the oversold threshold of the indicator.
The buy signal from oversold territory combined with the formation of a triple bottom served as a strong indication that HD would head higher. Taking an entry point at $32.50, near the buy signal in Full Stochastics, would have been much better than waiting for confirmation of the pattern with a breakout above $34. The lower entry point would have enabled a trader to set a much tighter stop loss below horizontal support.
Figure 11.8
Example:
Recall the head and shoulders bottom that formed in Mobil Telesystems (MBT) as shown in Figure 11.8. The stock confirmed the bullish reversal pattern when it broke above horizontal resistance at the $31 level.
An earlier indication of a breakout was offered when Full Stochastics generated a buy signal from below the 20 level. The buy signal occurred at the same time the right shoulder of the pattern was forming. This was around the $28 to $29 area.
Again, the buy signal in Full Stochastics served two purposes. It could have been used to gain a much earlier and better entry point. And, the buy signal added credence to the breakout above the horizontal resistance of the head and shoulders bottom.