TRADING TECHNIQUES The Short-Range Oscillator
And The DJIA by Christopher Cadbury
Oscillators come in many shapes and forms. Here, one unique oscillator is analyzed to determine patterns and the results in the stock market after a particular pattern occurs.
A simple oscillator mathematically modifies the price data so the results oscillate in a range. Some oscillators use a range of zero to 100, while others move above and below zero. For example, one popular oscillator is the difference between today's closing price and a 20-day simple moving average (SMA) of the closing price. If the closing price is above the SMA, then the oscillator will show a positive value. If the closing price is below the SMA, the oscillator will show a negative reading. Technicians will plot the values for the oscillator right below the price chart to determine relationships between the price and the oscillator. Patterns on the oscillator may indicate reliable trading signals. These signals may evince market reversals or confirmations of market trends.
Oscillators are not always as simple as the one just described. One example is the short-range oscillator, which is presented on the back page of the Trendline Daily Action Stock Service , published by Standard & Poor's Corp.Subscribers may obtain daily values about 30 minutes after the stock market closes.
The short-range oscillator is a combination of the daily number of advances, daily unchanged, and closing prices of the Dow Jones Industrial Average (DJIA). The indicator measures the strength of the stock market using a combination of the breadth of the market movement and the price direction. The indicator uses the differences between the raw values and their respective moving averages. The short-range oscillator uses a horizontal line of neutral values, which in the charts is referred to as the zero line . Generally, the oscillator patterns in relation to the zero is important. For the complete calculation, see the "Short-range oscillator" sidebar.
The standard use of the short-range oscillator with values of 4.0 and over indicates an overbought market and that a market decline is due. Values of -4.0 or below indicates an oversold market, and a market rally can be expected. Unfortunately, these values are frequently not very helpful because markets that are overbought stay overbought and oversold markets often remain oversold.