The Ultimate Oscillator Indicator

Ultimate Oscillator

Introduction

In 1976 Larry Williams Developed the Ultimate Oscillator. The Ultimate Oscillator indicator is a technical analysis tool used to measure momentum across three measure time frames. In simple terms Ultimate Oscillator is a way to measure BP (buying pressure) .Ultimate Oscillator uses weighted sums of three oscillators, each of them uses a different time period. Ultimate Oscillator uses different time frames in its calculation as opposed to just one time frame which is what is used in different momentum oscillators.

Calculation/Construction

1. Calculate Buying Pressure to determine overall direction of price action.
2. Measure buying Pressure relative to the true range.
3. Create Average based on the three time frames involved.
4. Create weighted Average of the three averages.

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Buying Pressure ( BP)  measures the level of  current  close  compared to  the current low  or previous close.

True Range (TR) measures the price range from the cureent  high or previous close (whichever is highest) to the current low or previous close (Whichever is lowest ). Both BP and TR take into account the previous close to explaing gaps from one period to next. BP  is then compared to the TR by dividing the Y period sum of BP by the Y period sum of TR.

Averages are created for different periods of 7, 14, and 28 days. Then weights are alloted to the averages .Weighted average is then created by multiplying the shortest avg by 4, the middle avg by 2 and the longest avg by 1. All these weighted amounts are then summed and then divided by the sum of the weights of 4+2+1.

The ultimate oscillator indicator calculations for Sintex Industries Ltd have been shown in the excel file below.

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Two examples from Indian stock market (Sintex and Suzlon)

   Sintex Industries Limited (Chart for ultimate oscillator)

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Interpretations:

• The period between August and October sees a bullish divergence. This is followed by a significant rise in the prices.
• The period between March and May sees a bearish divergence which is accompanies by a head and shoulders pattern and a steep fall thereafter.
• In March the levels of the indicator are above 70 which shows that the stock is overbought.
• In mid-August, the level is below 30 which indicates that the stock is oversold.

Suzlon Energy Limited(Chart for ultimate oscillator)

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Interpretations:

• Between April and May the indicator achieves a lower low. This is accompanied by a sharp drop of prices after forming a head and shoulders pattern.
• Between mid-May and June there is a bearish divergence which is immediately followed by a sharp drop in prices.
• The head and shoulders pattern forms between March and mid-April which indicates an impending downward trend.

Conclusion:

• The formation of a bullish divergence where the oscillator achieves a higher low can be considered a buy signal
• The formation of a bearish divergence by the oscillator can be considered to be a sell signal.
• The oscillator level going over 70 indicates that the stock is overbought and if the level goes below 30, it mean that the stock is oversold.
• The level of 50 is considered as a reference to judge whether the scenario is bullish or bearish. Above 50 is considered bullish whereas below 50 is considered bearish.
• The ultimate oscillator should not be used in isolation for making decisions. Other indicators and analyst tools must also be used to confirm predicted trends.