A Short-Term Buy Signal For The DJIA by John Toombs
Buying the first retreat in prices following a strong move up in the Dow Jones Industrial Average (DJIA) is often profitable. Three questions are involved in doing so, however. What constitutes a "strong move up"? Then should you buy? When should you close the position?
All three questions can be answered by using a slow version of the 20-day stochastic oscillator. Since September 1984 there have been 20 signals, almost four a year. Nineteen have been winners and only one a loser.
The stochastic oscillator, with its scale of zero to 100%, shows whether closing prices have been near the upper or the lower limits of the range of highs and lows for a predetermined period of time, in this case 20 trading days. The 20-day raw value locates the position of the last close of the DJIA within the range — lowest low to highest high — during the last 20 trading days.