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In the last issue of Trading Tutors I reviewed the prospects for the finance sector in general and the banks in particular. One aspect that I failed to stress was that we must be careful of our timing. I am looking to buy in but I am waiting for the ‘oscillating’ to complete. All traders must fine-tune their own timing.
And on the matter of oscillation, I received a note from a reader called mail from Liz only today asking about oscillator behaviour:
‘I have never understood the oscillator. I know it has to retreat 40-90% but have never worked out 40-90% of what. Can you elucidate?’
By way of explanation, let me start with three CBA charts:
- A 90 day Elliott with an exaggerated Oscillator
- A 300 day Elliott to give us a medium-term projection, and
- A 90-week Elliot to give us a long-term view
click to enlarge
click to enlarge
click to enlarge
The ProfitSource default Elliotts are 300-day and 300-week. My defaults are 90-day and 90-week. This is just my preference and there is no point in debating the pros and cons as most indicators in most software packages allow – even encourage – you to modify to your own specs. I remember in my early days of technical analysis, there were fierce debates about indicators and defaults. After I had learnt as much as I felt I needed, I eschewed organised discussion groups because the debates overtook everything else. My only interest was making money. Still is.
So you see, Liz, I don’t have a strong view on very many aspects of technical analysis. And I can’t say I have ever heard of a retreat of 40-90%, which does seem a very wide band. I am not being critical, that is merely an observation. And “a retreat from what?” you ask. Well, let’s not call it a ‘retreat’ for the moment – let’s use the word ‘retracing’. A market retraces from its last big move. If we talk ‘retreat’, we mean from the last high. In the first chart of CBA above you can see how price and the oscillator peaked together before they both turned down.
We must remember that an oscillator is only an index, as opposed to stocks or markets that are factual in terms of price. Prices are absolutes. An Oscillator is relativity.
So a 90% retracement - as we have seen for CBA - could have you buying in too soon. At the time of writing (Wednesday), we don’t know and will not know for a few days yet. Of course, in the meantime we could forego some value. If we buy in early and the market takes off, then we have ‘lost’ some time. But I take the view that you are better to wait and give up some points and have the pullback confirmed.
At the very least, we want to see the retracing Oscillator reverse. In the case of CBA, we want it to turn up.
I am not yet satisfied with the CBA Oscillator. It has not turned back up and looks like it may continuing down. I prefer a retracement back to almost zero, i.e. almost 100%. As I have said many times, I don’t want to see it go too far below zero.
The weekly chart suggests that the oscillator has a long way to go before zero is reached. We may in fact see a price somewhere nearer its high, in weekly terms. That is not to say there may not be a tilt at a new high around $70. This could happen before we see a retracement back to about $60, which could be many months away.
Sometimes indicators can be easily understood and at other times not. The turning Oscillator is in the latter category.
Enjoy the ride
Tom Scollon |