Stochastics and long-term trends
by Thom Hartle
The price of the bond futures market reacts to changing fundamentals that are global in nature and very
complicated—Foreign Central banks' policy on the exchange rate for the dollar, the rate of money supply
growth in the United States, the employment situation, our fiscal policy, growth in the import and export
sector, the Japanese stock market, the price of oil, international political tensions, just to name a few of
the fundamentals ! Day in and day out the marketplace analyzes, discusses, researches and acts on these
fundamentals and more.
While there appears to be an overwhelming source of information to dissect, it seems that the large
economic forces affecting the price of bonds actually produces very long trends.
One of the indicators that I use to indicate the direction of long-term trends (lasting anywhere from one to
three years) and price areas for possible reversals is the stochastics oscillator originated by George Lane.
An oscillator typically warns that a trend reversal is developing as price reaches an extreme level. Lane's
stochastics oscillator analyzes the relationship between daily closes and their proximity to the high or low
for the day.
The positive rising price trend signal occurs when the %K crosses the %D line to the plus side. (See
related article, "Stochastics oscillator," on the following page.) A negative, falling price trend exists if the
%K is below the %D line. Overbought is the +80 level while oversold is the +20 level (Figure 1 ).