This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

The Modern Art of Tape Reading: Part 3

TheStreet Premium Services

A complimentary preview
of Options-Profits Previews

Refer back to part 2 of this series. See the list of 6 indicators that I know work for me. We begin with the slow stochastic and the RSI (relative strength indicator). The slow stochastic must be confirmed by the RSI. The RSI tends to lead the slow stochastic. Thus look to the RSI and then see if it confirms any cross-over of the fast line over the slow line of the slow stochastic. A non-confirmation of the RSI relative to the slow stochastic is a red flag, a stop sign of sorts that should tell you to halt the study at that time. I use this methodology in both stock price directions. The trigger value for the RSI is the 50 level, the RSI moving up through 50 or turning down through 50. The edge found here is in knowing how these two indicators work in tandem.

Merely knowing the importance of the RSI will keep you from raising the risk probability for any trade. Seeing a slow stochastic cross (the fast line crossing over the slow line) is not a buy or sell signal. In strongly trending bull or bear cycles the slow stochastic might do such crossings more than a few times, yet the stock or index in question does not react to that cross. Those are the times when the RSI did not confirm the cross! Thus the edge found here is in knowing that a trend is still in control until the RSI signals that the trend is in jeopardy of ending.

You will at times find the slow stochastic remaining very strong or very weak for what is felt to be an inordinate amount of time relative to your experience when analyzing a certain stock or index. I refer to such chart patterns as either being that of pressing up, or floundering down. When you encounter such a slow stochastic pattern avoid going counter-trend unless the RSI first turns counter-trend. Trying to predict that counter-trend move any other way is best left alone. Taking the contrary trade to a strong trend is equal in all respects to fighting the tape. You have a big edge in simply knowing not to do that!

I do not use other technical indicators such Money Flow, MACD, ROC, etc. My scrubbed list works for me. I keep technical analysis simple yet effective. I avoid indicators that I think of as being not relative to the way I trade as well as being possibly redundant information that is already priced into the RSI and slow stochastic. In addition the more you analyze the more time is taken up in the endeavor. Thus you might reach the emotional and mental point where you do not take the trade! Falling into that trap is known as paralysis from analysis. Avoiding that potential problem is in itself an edge.

Technical analysis is best considered as being a crude map. Never forget the humorous market adage that Columbus used maps. The edge is found in keeping the technical work simple yet effective. One more edge is having the wisdom and experience to know that the fundamentals will eventually trump the technicals.

Part 4 will focus on the edges found in Simple Moving Averages (SMA).

OptionsProfits can be followed on Twitter at

EXCLUSIVE OFFER: Jim Cramer's Protégé, Dave Peltier, only buys Stocks Under $10 that he thinks could potentially double. See what he's trading today with a 14-day FREE pass.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
Top Rated Stocks Top Rated Funds Top Rated ETFs