How to Use and Interpret a Center Line Oscillator
Most Technical and
Retail Traders are familiar with high and low range oscillators or what is
often called an Overbought or Oversold Oscillator. However few really
understand or use a Center Line Oscillator which is extremely useful during
volatile market conditions, when giant to large lot Market Participant Groups
are trading the opposite side of the market from smaller lot Market Participant
Groups which is what creates volatility most of the time.
Understanding the
relationship between the larger lot institutional activity and the small lot
activity of the retail crowd, helps guide traders towards trading with the
larger lots rather than against them. This reduces whipsaw losses, weaker
trades, and frustration.
At all times
Technical and Retail Traders should know which Market Participant Groups are in
control of price, as this information relates to how price will behave in the
near term for Intraday, Day, Swing, and Position Trading.
Today we will study
the Chaikin Oscillator ChiOsc is a Center Line Oscillator, which has the
ability to move in opposition to price. This is one of the key benefits of any
oscillator that uses a center line. When using these oscillators Technical
Analysts are not looking at Overbought versus Oversold conditions of price on
the Short Term or Daily Trend. The use of a center line in an oscillator
indicator is to determine and reveal whether the power behind the price action
is on the buy side or sell side. This creates a negative divergence, whenever
the giant to larger lot Market Participant Groups are trading the opposite side
of a trade from the Retail or Smaller Lot Traders.
See the stock chart
example below for an excellent example, of how this indicator can warn early
that giant to larger lots are selling down.
This was actually
Quiet Rotation™ activity as indicated within the red box drawn on the chart,
when smaller lots and High Frequency Trading HFT speculation drove price upward
on declining Volume. Giant and large Institutions were consistently and
steadily rotating out of DIS, slowly and regularly selling shares as smaller
lots were buying on what they assumed was merely a dip.
Quiet Rotation™
patterns from giant and large lot Institutions selling are very tough to see
unless you use indicators that move contrarily to price. Most Momentum Price
Indicators move in harmony with price, lagging slightly behind it.
The ChiOsc Indicator
with a standard Stock Charts.com setting and an Exponential Moving Average EMA
to aid in the interpretation, clearly shows that giant to larger lots were
selling into the retail crowd rally. In other words the giant and larger funds
wanted to sell inventory they held of this stock, to reduce their risk as the
company financials indicated a business cycle contraction. They hid their
selling by waiting for the stock to move up, then started steady Time Weighted
Average Price TWAP rotation automated orders, triggering regularly as price
moved upward.
It is clear to see
that the ChiOsc Indicator is moving down while price is moving up, which is a
huge negative divergence. When Technical and Retail Traders are able to use a
Center Line Oscillator indicator properly, they can improve their profitability
and consistency of success trading stocks short term.
Summary
Understanding why a rally fails is important. This
rally was never going to succeed and here are the reasons why:
2. Smaller lots and not giant to
larger lots were moving price up
3. Giant funds were selling into the
rally regularly
Adding a couple of additional indicators to your
favorites can dramatically improve your trading results
Followers may request
a specific article topic for this blog by emailing: info@technitrader.com
Trade Wisely,
Martha Stokes CMT
TechniTrader technical analysis using a StockCharts chart, courtesy of StockCharts.com
Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses
TechniTrader DVDs with every course.
©2016–2024 Decisions Unlimited, Inc. dba TechniTrader. All rights reserved.
TechniTrader is also a registered trademark of Decisions Unlimited, Inc.
Disclaimer: All statements are the opinions of TechniTrader, its instructors and/or employees, and are not to be construed as anything more than an opinion. TechniTrader is not a broker or an investment advisor; it is strictly an educational service. There is risk in trading financial assets and derivatives. Due diligence is required for any investment. It should not be assumed that the methods or techniques presented cannot result in losses. Examples presented are for educational purposes only.