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.Chart 5-7 shows how the buy stops are hit, driving themarket up to Fibnode resistance.After the up move, the Stochastic gets back in line withthe MACD and the market returns to its previous direction, perhaps to new lows.Thistype of action is repeated again and again in a variety of Time Frame charts.Just be sureyou are involved in thrusting markets in order to help avoid possible whipsaws. Chapter 5 Trend Analysis MACD/Stochastic Combination 65CHART 5-7In teaching the use of this MACD/Stochastic combination signal, I typically break it upinto levels of complexity and teach up to the level possible, depending upon thepresentation setting and the experience level of the students.The above explanationinvolves level 1 (waiting for both indicators to agree before defining a Trend), and level 2(the concept of fading the weak Stochastic indicator while positioning yourself in theprevailing Trend).Later we will have examples of level 1 & 2 utilization of this technique.Level 3 (anticipating or acting on an unconfirmed signal) will be discussed somewhat,while level 4 involves sliding your Time Frame and is too complex a subject to beadequately covered outside a classroom setting.To give you some idea, however, as inthe example above, the half hour Trend would typically be on a sell to further support ourStochastic fade on the five minute chart.There will be more examples after we coverFibonacci analysis.Now, let's drop back, and look at this from a different perspective.If you think about thisapproach and consider the mathematics of the Stochastic, you will see how a market canbe made to turn.Consider a large local or, more likely, a group of locals who are shortthe market.If they can hold prices at a given high for several bars (keep prices from goinghigher), it will force the (weak) Stochastic to turn south.The weak longs start sellingtheir positions and weak shorts initiate new positions on the sell side.Now the locals (andwe) can buy those sell orders.The locals can take their several ticks profit while we canposition ourselves for the expected new high, or a move up to a Fibonacci expansionPoint.If we tried to buy stop the old highs instead of buying in on the dips, we would be 66 DiNapoli Levelsat a point of high market slippage.Upon being filled we would have to suffer through yetanother pullback, while the locals who have fed us the sell orders, endeavor to make aprofit.If we buy the Stochastic sell and the MACD ends up breaking (giving a sell as wellas the Stochastic), we know we're wrong and we take the next rally out.If we areoperating on a short term Time Frame and have adequate experience employing thismethod, it is possible to break even, pick up a few ticks, or perhaps suffer only a few tickloss, even when we are wrong!CHART 5-8Let's take a look at a relatively simple example on daily crude oil, Chart 5-8.We obviously have a thrusting, up trending market as defined by the 3X3.If you playedthis market primarily from the long side on the way up, you'd have done very well.Youwould not have gotten into trouble by selling point Tl, or by buying points T2 or T3.Youwouldn't have made any of these trades, even though Trend rules learned previouslywould have justified such a play.(We will discuss Directional Indicators which overruleTrend in the next chapter.They would have you buying at Tl, and selling at T2 and T3,which are all at near perfect Fibonacci retracement points.Pardon me for digressing, but aquick look ahead is sometimes useful.) Now, back to the point. Chapter 5 Trend Analysis MACD/Stochastic Combination 67CHART 5-9Chart 5-9 is the same daily crude oil chart depicted in Chart 5-8, with the MACD andStochastic indicators added.The entire downtrend after the high was contained by the MACD.The rally up toFibonacci resistance at point T3, supported by the Stochastic, gave us a perfectopportunity to get short.The same can be said for the up move preceding the high.The up move was almosttotally contained by the MACD, while the Stochastic gave us ample opportunities to getlong when the market retraced.FREQUENTLY ASKED QUESTIONS:Wouldn't it be better to have two strong Trend indicators, instead of one weak, and onestrong ?No.The weak Stochastic shows the hand of the weak players.It can also show theStrength of the market.If the Stochastic gives a sell and there's no discernible movementdown in price, watch out for a big move up! 68 DiNapoli LevelsConservative Carl: Do you wait for the bar (time period) to close before making adetermination that the indicator has given a signal?This question leads us into level 3 understanding
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