Overview

The Volume Rate-of-Change ("ROC") is calculated identically to the Price ROC, except it displays the ROC of the security's volume, rather than of its closing price.

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Interpretation

Almost every significant chart formation (e.g., tops, bottoms, breakouts, etc) is accompanied by a sharp increase in volume. The Volume ROC shows the speed at which volume is changing.

Additional information on the interpretation of volume trends can be found in the discussions on Volume and on the Volume Oscillator.

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Example

The following chart shows Texas Instruments and its 12-day Volume ROC.

When prices broke out of the triangular pattern, they were accompanied by a sharp increase in volume. The increase in volume confirmed the validity of the price breakout.

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Calculation

The Volume Rate-Of-Change indicator is calculated by dividing the amount that volume has changed over the last n-periods by the volume n-periods ago. The result is the percentage that the volume has changed in the last n-periods.

If the volume is higher today than n-periods ago, the ROC will be a positive number. If the volume is lower today than n-periods ago, the ROC will be a negative number.

Overview

The Price Rate-of-Change ("ROC") indicator displays the difference between the current price and the price x-time periods ago. The difference can be displayed in either points or as a percentage. The Momentum indicator displays the same information, but expresses it as a ratio.

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Interpretation

It is a well recognized phenomenon that security prices surge ahead and retract in a cyclical wave-like motion. This cyclical action is the result of the changing expectations as bulls and bears struggle to control prices.

The ROC displays the wave-like motion in an oscillator format by measuring the amount that prices have changed over a given time period. As prices increase, the ROC rises; as prices fall, the ROC falls. The greater the change in prices, the greater the change in the ROC.

The time period used to calculate the ROC may range from 1-day (which results in a volatile chart showing the daily price change) to 200-days (or longer). The most popular time periods are the 12- and 25-day ROC for short to intermediate-term trading. These time periods were popularized by Gerald Appel and Fred Hitschler in their book, Stock Market Trading Systems.

The 12-day ROC is an excellent short- to intermediate-term overbought/oversold indicator. The higher the ROC, the more overbought the security; the lower the ROC, the more likely a rally. However, as with all overbought/over-sold indicators, it is prudent to wait for the market to begin to correct (i.e., turn up or down) before placing your trade. A market that appears overbought may remain overbought for some time. In fact, extremely overbought/oversold readings usually imply a continuation of the current trend.

The 12-day ROC tends to be very cyclical, oscillating back and forth in a fairly regular cycle. Often, price changes can be anticipated by studying the previous cycles of the ROC and relating the previous cycles to the current market.

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Example

The following chart shows the 12-day ROC of Walgreen expressed in percent.

I drew "buy" arrows each time the ROC fell below, and then rose above, the oversold level of -6.5. I drew "sell" arrows each time the ROC rose above, and then fell below, the overbought level of +6.5.

The optimum overbought/oversold levels (e.g., ±6.5) vary depending on the security being analyzed and overall market conditions. I selected ±6.5 by drawing a horizontal line on the chart that isolated previous "extreme" levels of Walgreen's 12-day ROC.

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Calculation

When the Rate-of-Change displays the price change in points, it subtracts the price x-time periods ago from today's price:

When the Rate-of-Change displays the price change as a percentage, it divides the price change by price x-time period's ago:

Overview

The Price Oscillator displays the difference between two moving averages of a security's price. The difference between the moving averages can be expressed in either points or percentages.

The Price Oscillator is almost identical to the MACD, except that the Price Oscillator can use any two user-specified moving averages. (The MACD always uses 12 and 26-day moving averages, and always expresses the difference in points.)

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Interpretation

Moving average analysis typically generates buy signals when a short-term moving average (or the security's price) rises above a longer-term moving average. Conversely, sell signals are generated when a shorter-term moving average (or the security's price) falls below a longer-term moving average. The Price Oscillator illustrates the cyclical and often profitable signals generated by these one or two moving average systems.

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Example

The following chart shows Kellogg and a 10-day/30-day Price Oscillator.

In this example, the Price Oscillator shows the difference between the moving averages as percentages.

I drew "buy" arrows when the Price Oscillator rose above zero and "sell" arrows when the indicator fell below zero. This example is typical of the Price Oscillator's effectiveness. Because the Price Oscillator is a trend following indicator, it does an outstanding job of keeping you on the right side of the market during trending periods (as shown by the arrows labeled "B," "E," and "F"). However, during less decisive periods, the Price Oscillator produces small losses (as shown by the arrows labeled "A," "C," and "D").

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Calculation

The MACD is calculated by subtracting the value of a 26-day exponential moving average from a 12-day exponential moving average. A 9-day dotted exponential moving average of the MACD (the "signal" line) is then plotted on top of the MACD.

When the Price Oscillator displays the difference between the moving averages in percentages, it divides the difference between the averages by the shorter-term moving average: