r e l a t i v e // strength

This is an excerpt from an email to a friend regarding stochastics...

The way I understand stochastics, you're looking for divergence between the fast-moving line (K) and the slower-moving line (D) -or- when there is an intersection of the two lines. So, for example, you're watching for a spike in momentum that would cause the fast-moving K to cross the slower-moving D and continue accellerating in that direction... thus giving a buy/sell signal.

There is a weighting assigned to the fast-mover and the slow-mover in the formula and a number called the "raw stochastic value" is also factored in. (I had to look that one up.) Here's how it's all computed:

raw stochastic value = ((Close - Low10) / (High10 - Low10)) * 100

where:

close=lastest closing price

low10=lowest low from last 10 trading sessions

high10=highest high from last 10 trading sessions

If you think about the formula, it's basically the quotient of:

the difference of today's close and the lowest low from the last 10 days

divided by:

the range of the highest high and lowest low from the last 10 days

multiplied by 100, which gives you a percentage.

The percentage tells us how the differential of today's close relative to the 10 day low compares with the entire range (from high to low) that has occurred in the last 10 days. So, in other words, how does today's trading activity compare to the price range fluctuation in the last 10 days... and a percentage is given.

For example, if corn traded in a range from 2.50 to 2.60 in the last 10 trading days and we're on the 10th day and corn closed at 2.52, then the math is as follows

raw stochastic = [(2.52 - 2.50) / (2.60 - 2.50)] * 100 = 20%

The %D and %K are computed using the raw stochastic as well as previous %D and %K values (so it's a recursive formula in nature). The way I've seen %D and %K given is smothed using a 3-day moving average. That formula goes:

%K = 2/3 last %K + 1/3 raw stochastic

%D = 2/3 last %D + 1/3 new %K

So the raw stochastic computed above is used to find %K, which is the faster moving line and the %K is used to compute %D, which is the slower moving line. To make sense of the values is very much like the RSI in that over 70 is overbought and less than 30 is oversold.

What I take away from the chart is that corn is oversold right now (from stochastics) and we're bumping into a support level that began at the low in Dec-05. If support is violated, then January's flat support will be tested and next would be the December low.

Hopefully that helps. I've seen different intervals of time used for the calculation of the raw stochastic, but the math is the same.