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2018issue C106

Constructing composite relative-strength-index stochastics for reversal confirmation

A composite oscillator applies a stochastic-oscillator transform to two moving averages of relative-strength-index differences so the later reading is smoother. The same construction is meant to mark a turn-from-extreme and to classify the reversal as convergent or divergent.

  • A composite oscillator is constructed by applying a stochastic transform to two moving averages of relative-strength-index differences, and those averages are included to smooth the later reading.
  • The intended turn-from-extreme occurs when the composite turns up from the low side or down from the upper side, and the same construction is meant to classify the reversal as convergent or divergent.
  • A dual-horizon-lookback can pair a daily lookback of 14 with a weekly lookback of 70, but a weekly-and-monthly pair still needs an explicit monthly lookback that this extract does not supply.
  • Sampling interval is a first-order construction choice because results from one horizon are not assumed to transfer automatically to another.
Entries in this reading3 entries
Stochastic oscillator19 readingsRelative Strength Index28 readingsCurrent trackPrice-indicator divergence35 readings

Construct the composite oscillator

A composite oscillator can be constructed by applying a stochastic transform to two moving averages of relative-strength-index differences.

Those moving averages on the relative-strength-index differences are included to smooth the later oscillator reading. The relative-strength-index is the raw series. Differences of that series are averaged to form a smoothed-rsi-difference, and a stochastic-oscillator transform then locates that smoothed series inside its recent range.

Read a turn-from-extreme and classify the reversal

The intended turn reading occurs when the composite oscillator turns up from the low side or down from the upper side. That turn-from-extreme is the construction target.

The same construction is meant to classify the reversal as convergent or divergent, not only to mark the turn. Divergence is a chart condition in which price direction and oscillator direction disagree. It is used here to classify the reversal rather than as a standalone overlay.

Keep two sampling horizons on one chart

A dual stochastic on one chart can pair a daily lookback of 14 with a weekly lookback of 70. That dual-horizon-lookback plots two stochastic-oscillator calculations, each with its own sampling interval and lookback.

A weekly-and-monthly dual stochastic still needs an explicit monthly lookback. That monthly input is requested in the exchange and is not supplied in this extract.

Sampling interval is treated as a first-order construction choice because results from one horizon are not assumed to transfer automatically to another.

A labeled example does not match its panel

A labeled positive-divergence example had two chart panels exchanged, so the described price direction did not match the panel that was shown.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
31 of 32 in the Price-indicator divergence track
201950-57 pp.Next on Price-indicator divergenceBuilding a smoothed Stochastic oscillator of the Relative Strength Index for Price-indicator divergence checksThe featured construction applies a Stochastic oscillator to Relative Strength Index values rather than to raw price, then adds extra smoothing on the resulting range terms.
All readings on this track · 32 readings
  1. 1989Volume confirmation windows and exponential average construction
  2. 1990Constructing stochastic %K and %D from range position
  3. 1990Build a weekly leading sector composite from scaled transports and financials
  4. 1990Constructing stochastic K and D lines and divergence cues
  5. 1993Relative strength index events depend on the chosen input combination
  6. 1995Constructing a dual-horizon force index
  7. 1996Building a range-normalized divergence index from relative strength index
  8. 1998Treat RSI as a testable filter rather than a trigger
  9. 1999Primary-cycle windows, then stochastic confirmation
  10. 1999Stochastic rules versus buy and hold
  11. 2001Constructing confirmation filters for RSI overbought and oversold extremes
  12. 2003Constructing divergence-equivalent relative strength index and stochastic oscillators
  13. 2003Reverse-engineered RSI as a next-close projection
  14. 2003Scoring open versus resolved relative strength divergences
  15. 2003Bull-and-bear-balance from OHLC bar patterns
  16. 2003Constructing bull and bear balance from session paths
  17. 2004Four-month rule: auto stocks as a market-regime warning
  18. 2004Constructing stochastic oscillator bands, crosses and divergence
  19. 2004Volume as an independent check on price oscillators
  20. 2004Simple dual confirmation for a short-horizon index-futures system
  21. 2005Confirm a stochastic divergence by reclaiming the first-swing bar
  22. 2005Weekly stochastic divergence and a long average on 2005 high-yield entrants
  23. 2005Predicted averages from related market baskets
  24. 2006Rank price-oscillator divergences, then filter by trend
  25. 2006Relative-spread-strength for cycle confirmation
  26. 2007Weekly breakout stretch and histogram divergence
  27. 2011A luxury-auction stock as a cross-market bubble warning
  28. 2014Running-percentile close divergences and trend filters
  29. 2015Rebuilding the relative strength index from close-to-average gaps
  30. 2016Constructing higher-high and lower-low stochastic pairs
  31. 2018Constructing composite relative-strength-index stochastics for reversal confirmation
  32. 2019Building a smoothed Stochastic oscillator of the Relative Strength Index for Price-indicator divergence checks
By fieldIndicators and filters69 readingsBy year201815 readings
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