subject: Channeling Stocks And Stochastics [print this page] In a recent article titled Channeling Stocks Offer Great Investment Opportunities, research regarding the performance of channeling stocks was presented. This article will delve deeper into the research regarding how the performance of channeling stocks correlates with the Stochastics Oscillator.
What are channeling stocks?
First, channeling stocks, or sometimes called rolling stocks, are stocks that are moving up and down between their support price and their resistance price. While all channeling stocks will at some point break out of their channel in one direction or the other, many channeling stocks will continue to move up and down between their support price and their resistance price for a period of time. This provides the investor with an opportunity to make a fairly predictable return as the stock continues to move between its support price and its resistance price.
Criterion for Research
In order for the stock to be considered a channeling stock for this research, the stock had to first establish its resistance price and its support price by touching its support price and its parallel resistance price twice. The current price of the stock had to be within 1%, above or below, its previously determined resistance price or support price, which would be the third time it had been at this resistance price or support price. The distance between the support price and the resistance price had to be at least 15%.
Secondly, 1% of the average market capitalization traded each day for the last year had to be at least $1,000. While there are many thinly-traded penny stocks that trade in a channeling pattern, it is very hard to make a profit on these stocks after taking into account the trading fees.
Thirdly, the returns of the stocks were calculated for up to 60 days after the stock reached its resistance price or its support price. Any stock that closed more than 1% above its resistance price, in the case of shorting, or more than 1% below its support price, in the case of buying, was considered covered or sold at the closing price of that day.
Lastly, the period used for the Stochastics Oscillator was 14-3 days and the %D in the Slow Stochastic Oscillator was used as the measurement.
Results
Using the criterion above, over 11,000 U.S. Stocks were tested from January 2011 to January 2012. During that period there were 2,216 different stocks that traded in a channeling pattern at one time or another, representing 3,817 occurrences.
From the table above, it can be seen that the Channeling Stocks seemed to perform fairly consistently across all Stochastic ranges with the exception of the 80-90% range, which significantly outperformed the other ranges with a 26.7% average high above the support price. As well, this range rose above the support price 92% of the time.
