Constructing an Oscillator Using Two Moving Averages
posted under
Philosophy of Technical Analysis
by ceecabolos
Computers have taken the drudgery out of point and figure charting. The days of laboriously constructing columns of x's and o's are gone. Most charting software packages do the charting for you. In addition, you can vary the box and reversal sizes with a keystroke to adjust the chart for shorter or longer term analysis. You can construct p&f charts from real-time (intraday) and end of day data, and you can apply them to any market you want. But you can do a lot more with a computer.
Kenneth Tower (CMT), technical analyst for UST Securities Corporation, (5 Vaughn Drive, CN5209, Princeton, NJ. 08543) uses a logarithmic method of point and figure charting. A screening process that measures the volatility of a stock over the last 3 years determines the right percentage box size for each stock. Figures 11.19 and 11.20 show examples of Tower's logarithmic p&f charts applied to America Online and Intel. The box size for AOL in Figure 11.19 is 3.6%. A 1 box reversal, therefore, would require a retracement of 3.6%. Since that happens to be a 2 box reversal chart, prices would have to retrace 7.2% to start a new column. Each box size for the Intel chart shown in Figure 11.20 is worth 3.2%.The arcs you see on both charts are examples of using horizontal price counts across a price base to arrive at short and long term price objectives. The Intel chart, for example, shows a short term objective to 33, arrived at by measuring halfway across the price base (lower arc). The larger arc, which measures to 87.6, is arrived at by measuring across the entire price base and projecting that distance upward. If you look closely at Figures 11.19 and 11.20, you'll also see price dots trailing the price action. Those dots happen to be moving averages.
P&F MOVING AVERAGES
Moving averages are usually applied to bar charts. But here they are on point & figure charts, courtesy of Ken Tower and UST Securities. Tower uses two moving averages on his charts, a 10 column and a 20 column moving average. The dots you see in Figures 11.19 and 11.20 are 10 column averages. These moving averages are constructed by first finding an average price for each column. That is done by simply adding up the prices in each column and dividing the total by the number of x's or o's in that column. The resulting numbers are then averaged over 10 and 20 columns. The moving averages are used in the same way as on bar charts.
Figure 11.21 shows two point and figure charts of the same stock with 10 column averages (dots) and 20 column averages (dashes). The bottom chart is a 2.7% reversal logarithmic chart of Royal Dutch Petroleum going back to 1992. Notice that the faster moving average stayed above the slower moving average from 1993 to the 1997 during the four year uptrend. You can see the two moving averages coming together during the second half of 1997 in what turned out to be a consolidation year for that stock. To the far right, you can see that Royal Dutch may be on the verge of resuming its major uptrend. A closer look at that potential upside breakout is seen in the upper chart in Figure 11.21.The upper chart is a traditional one point reversal linear chart of the same stock. The time frame covered in the linear chart is much shorter than the long chart. But you get a closer look at the late 1997 and early 1998 price action and can see
short term upside breakout at the start of 1998. The stock still needs to close through 60 to confirm a major bullish breakout. The moving averages haven't been much help during the trading range (they never are), but should begin to trend higher once again if the bullish breakout materializes. By adding moving averages to point and figure charts, Ken Tower brings another valuable technical indicator to p&f charting. The use of logarithmic charts also adds a modern wrinkle to this old charting method.
CONCLUSION
Point and figure charting isn't the oldest technique in the world. That credit goes to the Japanese candlestick chart, which has been used in that country for centuries. In the next chapter Greg Morris, author of two books on candlesticks, will introduce that ancient technique that has gained new popularity in recent years among Western technical analysts.
Kenneth Tower (CMT), technical analyst for UST Securities Corporation, (5 Vaughn Drive, CN5209, Princeton, NJ. 08543) uses a logarithmic method of point and figure charting. A screening process that measures the volatility of a stock over the last 3 years determines the right percentage box size for each stock. Figures 11.19 and 11.20 show examples of Tower's logarithmic p&f charts applied to America Online and Intel. The box size for AOL in Figure 11.19 is 3.6%. A 1 box reversal, therefore, would require a retracement of 3.6%. Since that happens to be a 2 box reversal chart, prices would have to retrace 7.2% to start a new column. Each box size for the Intel chart shown in Figure 11.20 is worth 3.2%.The arcs you see on both charts are examples of using horizontal price counts across a price base to arrive at short and long term price objectives. The Intel chart, for example, shows a short term objective to 33, arrived at by measuring halfway across the price base (lower arc). The larger arc, which measures to 87.6, is arrived at by measuring across the entire price base and projecting that distance upward. If you look closely at Figures 11.19 and 11.20, you'll also see price dots trailing the price action. Those dots happen to be moving averages.
P&F MOVING AVERAGES
Moving averages are usually applied to bar charts. But here they are on point & figure charts, courtesy of Ken Tower and UST Securities. Tower uses two moving averages on his charts, a 10 column and a 20 column moving average. The dots you see in Figures 11.19 and 11.20 are 10 column averages. These moving averages are constructed by first finding an average price for each column. That is done by simply adding up the prices in each column and dividing the total by the number of x's or o's in that column. The resulting numbers are then averaged over 10 and 20 columns. The moving averages are used in the same way as on bar charts.
Figure 11.21 shows two point and figure charts of the same stock with 10 column averages (dots) and 20 column averages (dashes). The bottom chart is a 2.7% reversal logarithmic chart of Royal Dutch Petroleum going back to 1992. Notice that the faster moving average stayed above the slower moving average from 1993 to the 1997 during the four year uptrend. You can see the two moving averages coming together during the second half of 1997 in what turned out to be a consolidation year for that stock. To the far right, you can see that Royal Dutch may be on the verge of resuming its major uptrend. A closer look at that potential upside breakout is seen in the upper chart in Figure 11.21.The upper chart is a traditional one point reversal linear chart of the same stock. The time frame covered in the linear chart is much shorter than the long chart. But you get a closer look at the late 1997 and early 1998 price action and can see
short term upside breakout at the start of 1998. The stock still needs to close through 60 to confirm a major bullish breakout. The moving averages haven't been much help during the trading range (they never are), but should begin to trend higher once again if the bullish breakout materializes. By adding moving averages to point and figure charts, Ken Tower brings another valuable technical indicator to p&f charting. The use of logarithmic charts also adds a modern wrinkle to this old charting method.
CONCLUSION
Point and figure charting isn't the oldest technique in the world. That credit goes to the Japanese candlestick chart, which has been used in that country for centuries. In the next chapter Greg Morris, author of two books on candlesticks, will introduce that ancient technique that has gained new popularity in recent years among Western technical analysts.
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