Stochastics

The Stochastics oscillator was developed by Dr. George Lane to track market momentum. The indicator consists of two curves:

1. %K compares the latest closing price to the total price variation over a given period.
2. %D is the "signal line" corresponding to the moving average of %K over a shorter period than the previous one, generally 3 sessions.

This indicator varies from 0 to 100.

The periods used in the indicator depend on the purpose for which Stochastics is employed and can be:

Purpose	Periods %K	Periods %D	Overbought Level	Oversold Level	Note
In association with a trend indicator	5 to 10 sessions	3 sessions	80%	20%	Very sensitive
Alone or for longer cycles	14 to 21 sessions	3 sessions	70 %	30 %	Shows only significant changes

Example

Interpretation

When Stochastics fluctuates near the 100 level, it signals an accumulation situation. A fluctuation near the zero level indicates a distribution situation.

The shape of the Stochastics curve gives some indication of future evolution:

• A narrow minimum that is not very deep indicates that "bears" are weak and the evolution should be strong.
• A wide and deep minimum signals that "bears" are strong and the evolution should be weak.

And vice versa:

• A narrow maximum indicates that "bulls" are weak and the correction is likely to be strong.
• A high and wide maximum indicates that "bulls" are strong and the correction is likely to be weak.