What good would I be as a resource if I did not provide you with an example on how you might go about using the stochastic indicator.

First, I needed to find a stock that has been trading sideways for the most part on a one-year weekly chart. The Jutia Portfolio provided me with one such candidate: Google (GOOG). Let’s take a closer look.

For this particular graph I used the “Slow Stochastic” indicator that Bigcharts has proved as an option. I was quite surprised to find that this chart of Google fits well in regards to the discussion points I brought up in my previous post on stochastics.

For example, I circled in red all the sell signals that were given when the stochastic crossed below the 80 mark. Also, I circled in green the exact point at which a buy signal was given when the stochastic crossed above 20.

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In Part I of my analysis and use of this indicator I also stated that divergences might appear once in a while and can be valuable when spotting the end of a recent trend. The chart above did not disappoint. You’ll notice that I drew a line connecting two descending points on the price of the stock. The mirror image of this occurs when at the same point in time I could connect two ascending points on the stochastic indicator. The rule of thumb in this case would be that when price goes down and the indicator trends up, there is a positive (bullish) divergence and you should be prepared to buy.

This indicator could have helped you buy in near $340 and sold out around $430 in approximately one month’s time.

Seeing that this is a fresh graph of Google, we will look towards the right side of the graph and determine the current status of this stock play. You will notice that the stochastics are indeed above the 80 mark. No bearish divergences have been given yet and the stochastics have not fallen below 80. As long as this scenario holds Google has a fighting chance to break above $500 in the short-term. If Google decides to trend upwards it may render this indicator irrelevant.