V.15:3 (125-128): Timing a Stock Using the Regression Oscillator by Richard Goedde

Timing a Stock Using the Regression Oscillator by Richard Goedde

Numerous techniques for timing transactions are available to the technical trader. One popular method uses the difference between the market trend and the price. Market timing strategies can be developed based on the market oscillating above and below the trend. Here are the basics of using an oscillator for timing a stock.

In investment analysis, an oscillator is a mathematical tool used to identify turning points in prices and is useful in timing the purchase and sale of a security. The regression oscillator (RO) fluctuates around a moving linear regression line of closing prices. It can be used to screen a database of stock charts for stocks in a long-term upward trend, determine the appropriate time to buy an upward-trending stock, and give an early warning signal that the long-term upward trend may be reversing.

Here’s how to develop the RO using technical analysis software and also by using a computer spreadsheet if technical analysis software is not available. Let me emphasize two points, however. First of all, the RO may be used in conjunction with any method an investor uses to select a particular stock. The oscillator’s purpose is to better time the purchase after the company has been selected, but because calculating the RO requires calculating the slope of the regression line, an investor may want to use the regression slope to select the stock itself. Second, although future price patterns may not repeat the past, stock prices tend to fluctuate within a range. An oscillator is useful in maximizing gains and minimizing losses regardless of the future direction of prices.