Constructing a dual-rate advance-decline oscillator

A breadth series, not a price index

The oscillator is built from the daily New York Stock Exchange advance-decline difference rather than from a price index. That advance-decline difference is the daily count of issues closing higher minus issues closing lower, and it is the raw breadth input to every later step.

The later trends, the residual, and the running sum are all taken from that same daily difference. A price index is not substituted at any stage of the construction.

The dual-rate trend pair

A 10 percent trend and a 5 percent trend are applied to that daily difference. Those two rates were treated as equivalent to a 20-day and a 40-day weighted moving average.

The two trend rates were chosen because they were taken to represent the two most dominant short-to-intermediate cycle lengths in the breadth series. Together they form the dual-rate trend pair: a faster 10 percent smoother and a slower 5 percent smoother applied to the same advance-decline series.

The oscillator was described as forming recurring patterns and as showing a 22- to 24-week interval between important bottoming formations. That dominant-cycle spacing is the recurring interval between important oscillator bottoms used to justify the chosen smoothing rates.

Oscillator residual and summation index

The breadth oscillator is defined as the faster 10 percent trend minus the slower 5 percent trend. It is read as an overbought-oversold residual of the dual-rate construction.

A companion summation index is constructed by adding each day's oscillator value, moving the same dual-trend residual onto an intermediate-to-long horizon.

Three features used to read the oscillator

Reading the constructed oscillator uses three jointly observed features: the current value, that value relative to prior readings, and the patterns those readings form.

The constructed series was assigned numeric bands, including brief extremes beyond +150 and -150, quieter turning zones between +60 and +90 and between -50 and -100, and reference levels at +130 and -130.

Level tests on the summation index

The summation series was given explicit level tests: a rise from below -1500 through zero and above +2000, a later downward cross of zero after a reading above 2000, and a print at or below -1500.

Those constructed crossings of zero after an extreme are zero-line timing, treated as a separate timing event from the extreme itself.