Five reading rules for smoothed indicator charts

A smoothed chart is not a finished forecast

Once indicator data have been smoothed, more than one reading construction can turn the chart into a forecast. A rule that fits one series is not assumed to be the best rule for another.

Editorial reading: treat a smoothed indicator as unfinished work. The educational task is not to stare at the line. The task is to attach an explicit construction so the same series becomes a hypothesis that can be tested.

Editorial grouping: five reading constructions can be attached to that series. They are a tail-band-reading, a moving-average-residual, an average-crossover-clock, a direction-step-code, and a pace-oscillator.

A tail-band-reading uses only the extremes

One construction is a tail-band-reading. It ranks the history of the indicator and treats the top 25 percent of prints as unusually high, the bottom 25 percent as unusually low, and the middle 50 percent as carrying no forecast.

A sloping series contaminates the tails

Those same high-low bands should not be applied to an indicator that already trends. The newest observations then sit in the unusual tail simply by being recent.

That print is a trend-contaminated-extreme. It looks rare only because the series already slopes, not because it is unusual relative to its local path.

A dispersion-shortcut stands in for ranking

A dispersion-shortcut can stand in for a full rank-order percentile count. Plus or minus one standard deviation around the mean is expected to leave about one-sixth of a normal sample above the upper band and one-sixth below the lower band.

Two-thirds of one standard deviation can approximate the 25-percent tails.

Apply the bands to a moving-average-residual

The same high-low band logic can be applied to deviations from a moving average. That gap is the moving-average-residual.

This is the construction used when the raw series itself slopes up or down, so a tail-band-reading can survive the slope.

An average-crossover-clock times the forecast

A forecast can be timed with an average-crossover-clock. The clock can be a sign change through zero, or one moving average crossing another.

One dual-average form compares a 26-week average with a 52-week average.

A direction-step-code stores rise or fall

Direction of movement can be stored as a direction-step-code. The coded array marks a rise, a decline, or no change versus a chosen earlier value, using the integers 2, 1, and 0 respectively.

A pace-oscillator measures size of movement

Size of movement is measured as rate of change, the series velocity or first derivative, sometimes misnamed momentum. That pace-oscillator converts a level into an oscillator.

It may compare the current print with the prior period, or with the same week a year earlier so seasonal effects drop out.