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Oscillators 2

CCI - Commodity Channel Index

The Commodity Channel Index measures the position of price in relation to its moving average.

**We present an in-depth examination of the CCI, developed by Donald Lambert. First a few
**

definitions:

The Typical Price (TP) = (H+L+C)/3

(High, Low, Close)

**If we wish to indicate the TP 3 periods ago (e.g. 3 days ago), we'll denote this with
**

TP(-3).

Simple Moving Average of the Typical Price (SMATP)

**An absolute value of a difference between two values, x and y, is usually denoted by |x-y|, but
**

we'll use abs(x-y).

We will sum the following and call it delta (using 20 periods):

delta = abs( SMATP - TP(-0)) + abs( SMATP - TP(-1)) + ... + abs( SMATP - TP(-20))

The mean deviation or MD (using 20 periods) is

MD = delta/20

CCI = ( TP-SMATP ) / (MD * 0.015)

How do we use it?

defined as follows: RSI = 100 . A negative divergence above +100 would increase the robustness of a signal based on a move back below +100. A positive divergence below -100 would increase the robustness of a signal based on a move back above -100. buy signal. a decline below +100 and a trend line break could be considered bearish. When curve goes below -100. Trend line breaks can be used to generate signals. an advance above -100 and trend line breakout could be considered bullish. From overbought levels.(100 / (1+RS) ) where RS = (avg of n days' up closes)/(avg of n days' down closes) Spreadsheet computations: .Relative Strength Index J. RSI . Jr developed the RSI. Trend lines can be drawn connecting the peaks and troughs. 70%-80% of the CCI curve falls between -100 and +100. sell signal. Wells Wilder.015 as the constant in the equation above. when it goes above +100.When using . From oversold levels.

A chart example: Applying the RSI This is similar to other oscillators. Here are some ways of applying the RSI. but shorter spans make the curve more sensitive and the wider its amplitude). .Here we use 14 days (typical span used for daily prices.

While the RSI graph varies between 0 and 100. There are two ways of playing a penetration of the 30 (or 70) line. Most analysts use 30 and 70 as the low and high points of a channel. Divergences Failure Swings .

L14) ] where C is latest close L14 is the lowest low of the last 14 periods H14 is the highest high for the last 14 periods The result is a number between 0-100 The second line. is the 3-period moving average of %K. Example: . %D.Stochastics (K%D) Two lines are used: Using a 14-period time view: %K = 100 [ (C-L14) / (H14 .

But these can give false signals when using a (fast) stochastic . in the slow stochastic above.The fast stochastic (above) is the one just described.leading to whipsaws. Using the Stochastic Like other oscillators. The slow stochastic's %K is a 3-period SMA of %K. Also look for divergences such as: Using a combination of overbought/oversold areas with slope divergences can be more effective.C) / (Hn . look for jumps above and below the extreme boundaries (20 and 80 for Stochastic).Ln) ] where . note the double top near Dec. (Also.) Larry Williams %R Formula %R = -100 [ (Hn .

MACD We revisit the MACD (moving average convergence-divergence. (C-Ln) in the stochastics. the usual ones (as seen above) are the 12-period and 26-periods. C is latest close Ln is the lowest low of the last n periods Hn is the highest high for the last n periods Typically. Williams %R is calculated using 14 periods Note: Since we use (Hn . .C) vs. the %R curve is an inverted form of K%D. so most charts invert the curve (hence the use of "-100" in the formula above). Some examples we've seen: Things to remember: The MACD line is the difference between two moving averages.

It helps us spot periods where the difference between these two lines is widening or narrowing. The signal line (shown as fainter. the more significant the price move. brown line above) is a 9-period moving average of the MACD line. look at points where the MACD line and the signal line cross. The histogram indicates the difference between these two lines and is used as a visual aid. Accumulation/Distribution Line This is a momentum indicator. The MACD histogram Using the charts above. The histogram is flat at these point.. The line is calculated as follows: The close location value is: . It is based on the premise that the more volume that accompanies a price move. How to interpret/use these two lines? Consider the chart above.. Another method is to look at the MACD line and find divergences as show above. Let's do some calculations on the board.

multiply CLV by the volume. Next. (H-C)-(C-L) approaches -(H-L) The CLV approaches +1 when the close is near the high. Similarly. the cumulative total is the Accumulation/Distribution Line. as the close approaches the low. Finally. low. where the close. Consider the following: As the close approaches the high. the difference.(H-C) approaches +(H-L). (C-L) . and approaches -1 when the close is near the low. Sample chart: . and high are used.

Signals: Bullish: Bearish: .

Chaikin Money Flow (CMF) Chaikin Money Flow is calculated by summing Accumulation/Distribution for 21 periods and then dividing by the sum of volume for 21 periods. Signals . On the CIEN chart. the Accumulation/ Distribution Value from the first day is removed and the value for the next day is entered into the equation. the purple box encloses 21 days of Accumulation/Distribution Values. To calculate the next day. The total of these 21 days divided by the total for the 21 days of volume forms the value of Chaikin Money Flow at the end of that day (purple arrow).

Example: .

Negative money flow is similar. Money Flow: Typical price (TP) = (H+L+C)/3 Money Flow = TP * Volume Positive Money Flow = sum of the positive money flow over n periods Negative Money Flow = sum of negative money flow over n periods (Positive money flow = TP that is greater than yesterday's TP.this is not necessarily the Chaikin Money Flow.Money Flow Index (MFI) At times you'll find reference to "money flow" . Marc Chaikin advises against using .[ 100 / (1 + Money Ratio) ] Variety of Indicators It is best to choose indicators that complement each other.) Money Ratio = PositiveMoneyFlow / NegativeMoneyFlow Money Flow Index = .

When a breakout occurs. All three are banded momentum oscillators that are good for detecting overbought and oversold conditions. As the text indicates. CCI and RSI as similar indicators. When in a sideways trend.A trend-following indicator to identify the underlying trend in the stock. but that is to be expected. oscillator buy signals are best is uptrends and sell signals are best in downtrends. • RSI .A momentum indicator used to identify potential overbought and oversold levels.indicators that have common characteristics. One possible combination of indicators would be the following: • Chaikin Money Flow . Chaikin singles out the Stochastic Oscillator. All three are excellent indicators. • Moving averages .A comparative indicator to identify the strength of the stock relative to a major index. As the up (or down) trend develops. the oscillator may already be in an overbought (or oversold) state. oscillators look very much like the price lines. Buy and sell signals are also generated in much the same fashion. the oscillator is more important. Recall that trend is important. • Price relative . . but it would be a waste of time to follow all three when one will be sufficient.A non-trend-following volume indicator to identify buying and selling pressure.

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