Aroon Oscillator

The Aroon Oscillator is calculated by subtracting Aroon Down from the Aroon Up indicator. It is interpreted as follows:

* Above 50 is considered a strong uptrending market
* Below -50 means that the market is trending lower;
* Near 0 means that the market is in transition and not trending.

The chart below of the mini-Dow Futures contract shows both the Aroon indicator and the Aroon Oscillator:

The chart below of the Gold futures contract shows how the Aroon Oscillator is interpreted:

A decrease of the Aroon Oscillator from above the 50 line shows that the uptrend is consolidating and is reversing direction downward. When the Aroon Oscillator hovers around the zero line over time, then the market is in a directionless period.

When the oscillator moves toward -50 from the zero line, the market is beginning to trend downward. And when the Aroon Oscillator is below -50, then the market is in a strong downtrend.

When the oscillator begins to move upward towards the zero line, the downward trend is slowing down and beginning to reverse direction.

In addition, when the Aroon Oscillator moves higher from the zero line, then the market is moving from a period of non-trending to a period of uptrending.

The Aroon indicator and Aroon Oscillator are extremely helpful tools for a trader to have and use; the Aroon indicator helps traders to determine when best to apply trending following indicators like Moving Averages (see: Moving Averages) and when best to use oscillator type technical indicators like Stochastics (see: Stochastics).

Aroon Indicator

The Aroon indicator is used to help traders know when a market is uptrending, downtrending, or is in a range-bound, trendless market.

Knowing when a market is trending is very useful, mainly because trend following technical analysis indicators are profitable during trending markets but cause losses during non-directional markets. Similarly, oscillators are extremely profitable indicators during range-bound markets, but perform very poorly during strong trending markets. The Aroon indicator can show which mode the market is in.

The chart of the Nasdaq 100 shows the different modes of the market and how the Aroon indicator reacts to these different market modes:

Interpreting the Aroon Indicator

When the Aroon Down indicator (in red above) is above the 70 line and the Aroon Up indicator (in greed above) is below 30, then the market is trending downwards.

In contrast, when the Aroon Up indicator is above the 70 line and the Aroon Down indicator is below 30, then the market is trending strongly upwards.

When the Aroon Up and Aroon Down indicator move towards the centerline (50), then the market is entering into a consolidation period.

By varying the period length, the Aroon indicator can give long term indications of trend or short-term indications of trend. By default, the Aroon indicator is 25-periods (shown in the chart above), but a shorter time frame could be 10-periods.

Aroon indicator that combines both the Aroon Up and Aroon Down is presented on the Aroon Oscillator.

Arms Index (TRIN)

volume-based confirmation indicator as well as overbought and oversold indicator. The Arms Index has four components listed below:

1. Advancing Issues on the New York Stock Exchange (NYSE) - $ADV or $NYADV
2. Advancing Volume on the NYSE - $UVOL or $NYUPV
3. Declining Issues on the NYSE - $DECL or $NYDEC
4. Declining Volume on the NYSE - $DVOL or $NYDNV

The formula for the Arms Index is simply:

(Advancing Issues / Declining Issues) / (Advancing Volume / Declining Volume)
The intra-day 5-minute chart of the mini-Dow futures contract shows the $TRIN:























Interpreting the Arms Index
* Neutral Reading = 1
* Bearish Reading > 1
* Bullish Reading <>

The trend of the Arms Index is usually more important than whether or not the Arms Index is above or below 1. As can be seen in the intra-day chart above, when the mini-Dow was falling in price, the Arms Index was increasing. At 1.5, a very high Arms Index reading, a trader could take a contrarian stance and buy at the 1.5 level. Of course it would be advisable to see a reverse or bottoming of the Arms Index before taking such action. Also notice that when the mini-Dow is increasing, the Arms Index is increasing as well.

The Arms Index can be used from a longer term perspective. Some traders use moving averages of the inputs into the Arms Index equation. To illustrate: (10-day Moving Average (MA) of Advancing Issues / 10-day MA of Declining Issues) / (10-day MA of Advancing Volume / 10-day MA of Declining Volume) or one could simply take the 10-day Moving Average of the $TRIN.

There are fundamental problems with the Arms Index, and these probems are discussed on the next page.

Advance Decline Line

The Advance Decline Line is used primarily to confirm price movement and detect divergences. The calculation of the Advance Decline Line is quite simple:

New York Stock Exchange (NYSE) Advancing Issues - NYSE Declining Issues

The calculated number is then added to the previous day's Advance Decline Line. To illustrate, say that todays advancing issues ($ADV or $NYADV) is 1,692 stocks. That is 1,692 stocks closed the day with an increase in their share price. The declining issues ($DECL or $NYDEC) is 1,311. At the NYSE, 1,311 closed the day with a decrease in their share price.

1,692 - 1,311 = +381

For the day, 381 more stocks closed the day higher than closed the day lower. This is a bullish sign. To continue the example, yesterday's Advance Decline Line totaled 45,874. Today's reading of +381 would be added to the total of yesterday. This would result in an updated total of 46,255.

Whether the total is positive or negative is irrelavent; what is relavent is the direction or the trend of the Advance Decline Line. An increasing Advance Decline Line is bullish because more stocks at the NYSE are closing the day with gains; whereas a decreasing Advance Decline Line is bearish because more stocks are closing the day with losses.

The Advance Decline Line is a powerful confirmation tool and divergence warning tool. The chart of the mini-Dow future contract of the Dow Jones Industrial Average or Dow 30 represents these confirmation and divergence signals:

High #1 to High #2
The mini-Dow future contract made a higher high at High #2; however, the Advance Decline Line failed to make a newer high, in fact it made a lower low. At High #2, less stocks were participating in the rally; thus, there was less strength behind the rally in the Dow Jones Industrial Average. This failure of the Advance Decline Line signaled a strong bearish divergence.

High #2 to High #3
This is an example of the Advance Decline Line confirming the trend in price of the mini-Dow future. The mini-Dow future made lower highs and likewise, the Advance Decline Ratio made lower highs.

Low #1 to Low #2
Yet another bearish divergence occured from Low #1 to Low #2. The mini-Dow futures contract made a higher low, an acknowledged bullish sign. However, the Advance Decline Line did not confirm the mini-Dow future's ascent. In fact, during the entire rally of the mini-Dow from Low #1 to Low #2, the Advance Decline Line was making lower lows. This bearish divergence signaled that stock investors and index futures traders should be wary of the recent increases; the market as a whole is not behind the recent move higher.

In conclusion, the Advance Decline Line is a very effective tool to confirm price action in stocks and stock indexes as well as signaling potential reversals or weak price moves. Another similar indicator is the Arms Index [TRIN]

Accumulative Swing Index

Developed by Welles Wilder in his popular technical analysis book New Concepts in Technical Trading Systems, the Accumulative Swing Index (ASI) is mainly used as a divergence and confirmation tool, but can be used for buy and sell signals as well. It was designed to be used for futures trading, but can be used for stock trading and currency trading too. Basically, the Accumulative Swing Index is a running total of the Swing Index.

The chart below of gold futures shows the Accumulative Swing Index:

Accumulative Swing Index as a Confirmation Tool

In the chart shown below, the Accumulative Swing Index confirmed Gold's downtrend. Subsequently, when Gold broke the downward trendline, the Accumulative Swing Index confirmed the trendline break as well.

Similarly, the upward move in the Gold futures contract was confirmed by the Accumulative Swing Index and the upward trendline break was confirmed too.

Buy Signal - Accumulative Swing Index

Buy when Accumulative Swing Index breaks above a downward trendline or, in a price consolidation period, above resistance.

Sell Signal - Accumulative Swing Index

Sell when the Accumulative Swing Index breaks below an upward trendline or, in a price consolidation period, below support.

In summary, the Accumulative Swing Index is best used as a confirmation tool with other technical indicators and charting patterns