bands are unusually far apart, that is oftena sign that the current trend may be ending. When the distancebetween the two bands has narrowed too far, that is often a signthat a market may be about to initiate a new trend. BollingerBands can also be applied to weekly and monthly price charts byusing 20 weeks and 20 months instead of 20 days. Bollinger Bandswork best when combined with overbought/oversold oscillatorsthat are explained in the next chapter. (See Appendix A for addi-tional band techniques.)
Centering the Average
The more statistically correct way to plot a moving average is tocenter it. That means to place it in the middle of the time peri-od it covers. A 10 day average, for example, would be placedfive days back. A 20 day average would be plotted 10 days backin time. Centering the average, however, has the major flaw ofproducing much later trend change signals. Therefore, movingaverages are usually placed at the end of the time period cov-ered instead of the middle. The centering technique is usedalmost exclusively by cyclic analysts to isolate underlying mar-ket cycles.212 Chapter 9
MOVING AVERAGES TIEDTO CYCLES
Many market analysts believe that time cycles play an importantrole in market movement. Because these time cycles are repetitiveand can be measured, it is possible to determine the approximatetimes when market tops or bottoms will occur. Many differenttime cycles exist simultaneously, from a short term 5 day cycle toKondratieff’s long 54 year cycle. We’ll delve more into this fasci-nating branch of technical analysis in Chapter 14.
The subject of cycles is introduced here only to make thepoint that there seems to be a relationship between the underly-ing cycles that affect a certain market and the correct movingaverages to use. In other words, the moving averages can beadjusted to fit the dominant cycles in each market.
There appears to be a definite relationship between mov-ing averages and cycles. For example, the monthly cycle is one ofthe best known cycles operating throughout the commodity mar-kets. A month has 20-21 trading days. Cycles tend to be related totheir next longer and shorter cycles harmonically, or by a factor oftwo. That means that the next longer cycle is double the lengthof a cycle and the next shorter cycle is half its length.
The monthly cycle, therefore, may explain the popularity ofthe 5, 10, 20, and 40 day moving averages. The 20 day cycle measuresthe monthly cycle. The 40 day average is double the 20 day. The 10day average is half of 20 and the 5 day average is half again of 10.
Many of the more commonly used moving averages(including the 4, 9, and 18 day averages, which are derivatives of5, 10, and 20) can be explained by cyclic influences and the har-monic relationships of neighboring cycles. Incidentally, the 4 weekcycle may also help explain the success of the 4 week rule, coveredlater in the chapter, and its shorter counterpart—the 2 week rule.
FIBONACCI NUMBERS USED ASMOVING AVERAGES
We'll cover the Fibonacci number series in the chapter on ElliottWave Theory. However, I'd like to mention here that this myste-tious series of numbers—such as 13, 21, 34, 55, and so on—seemto lend themselves quite well to moving average analysis. This isMoving Averages 213
true not only of daily charts, but for weekly charts as well. The 21day moving average is a Fibonacci number. On the weekly charts,the 13 week average has proven valuable in both stocks and com-modities. We’ll postpone a more in depth discussion of thesenumbers until Chapter 13.
MOVING AVERAGES APPLIED TOLONG TERM CHARTS
The reader should not overlook using this technique in longerrange trend analysis. Longer range moving averages, such as 10 or13 weeks, in conjunction with the 30 or 40 week average, havelong been used in stock market analysis, but haven’t been givenas much attention in the futures markets. The 10 and 40 weekmoving averages can be used to help track the primary trend onweekly charts for futures and stocks. (See Figure 9.10.)
 
foor16/95 (DWI X) Dow Industrials
 
Weekly Bar Chart
yt
alwifi!
 
 
 
 
 
 
Figure 9.10 Moving averages are valuable on weekly charts. The 40week moving average should provide support during bull market correctionsas it did here.214 Chapter 9
Some Pros and Cons of the Moving Average
One of the great advantages of using moving averages, and one ofthe reasons they are so popular as trend-following systems, is thatthey embody some of the oldest maxims of successful trading.They trade in the direction of the trend. They let profits run andcut losses short. The moving average system forces the user toobey those rules by providing specific buy and sell signals basedon those principles.
Because they are trend-following in nature, however, mov-ing averages work best when markets are in a trending period.They perform very poorly when markets get choppy and tradesideways for a period of time. And that might be a third to a halfof the time.
The fact that they do not work that well for significantperiods of time, however, is one very compelling reason why itis dangerous to rely too heavily on the moving average tech-nique. In certain trending markets, the moving average can’t bebeat. Just switch the program to automatic. At other times, anontrending method like the overbought-oversold oscillator ismore appropriate. (In Chapter 15, we’ll show you an indicatorcalled ADX that tells you when a market is trending and whenit is not, and whether the market climate favors a trendingmoving average technique or a nontrending oscillatorapproach.)
Moving Averages As Oscillators
One way to construct an oscillator is to compare the differencebetween two moving averages. The use of two moving averagesin the double crossover method, therefore, takes on greater sig-nificance and becomes an even more useful technique. We’ll seehow this is done in Chapter 10. One method compares two expo-nentially smoothed averages. That method is called MovingAverage Convergence/Divergence (MACD). It is used partially asan oscillator. Therefore, we’ll postpone our explanation of thattechnique unti] we deal with the entire subject of oscillators inChapter 10.Moving Averages 215
 
The Moving Average Applied to OtherTechnical Data
The moving average can be applied to virtually any technical dataor indicator. It can be used on open interest and volume figures,including on balance volume. The moving average can be used onvarious indicators and ratios. It can be applied to oscillators as well.
THE WEEKLY RULE
There are other alternatives to the moving average as a trend-fol-lowing device. One of the best known and most successful ofthese techniques is called the weekly price channel or, simply, theweekly rule. This technique has many of the benefits of the mov-ing average, but is less time consuming and simpler to use.
With the improvements in computer technology over thepast decade, a considerable amount of research has been done onthe development of technical trading systems. These systems aremechanical in nature, meaning that human emotion and judg-ment are eliminated. These systems have become increasinglysophisticated. At first, simple moving averages were utilized.Then, double and triple crossovers of the averages were added.The averages were then linearly weighted and exponentiallysmoothed. These systems are primarily trend-following, whichmeans their purpose is to identify and then trade in the directionof an existing trend.
With the increased fascination with fancier and more com-plex systems and indicators, however, there has been a tendencyto overlook some of the simpler techniques that continue to workquite well and have stood the test of time. We’re going to discussone of the simplest of these techniques—the weekly rule.
In 1970, a booklet entitled the Trader’s Notebook was pub-lished by Dunn & Hargitt’s Financial Services in Lafayette,Indiana. The best known commodity trading systems of the daywere computer-tested and compared. The final conclusion of allthat research was that the most successful of all the systems test-ed was the 4 week rule, developed by Richard Donchian. Mr.216 Chapter 9
Donchian has been recognized as a pioneer in the field of com-modity trend trading using mechanical systems. (In 1983,Managed Account Reports chose Donchian as the first recipient ofthe Most Valuable Performer Award for outstanding contributionsto the field of futures money management, and presents TheDonchian Award to other worthy recipients.)
More recent work done by Louis Lukac, former researchdirector at Dunn & Hargitt and currently president of WizardTrading (a Massachusetts CTA) supports the earlier conclusionsthat breakout (or channel) systems similar to the weekly rule con-tinue to show superior results. (Lukac et al.)*
Of the 12 systems tested from 1975-84, only 4 generatedsignificant profits. Of those 4, 2 were channel breakout systemsand one was a dual moving average crossover system. A later arti-cle by Lukac and Brorsen in Thé Financial Review (November 1990)published the results of a more extensive study done on data from1976-86 that compared 23 technical trading systems. Once again,channel breakouts and moving average systems came out on top.Lukac finally concluded that a channel breakout system was hispersonal choice as the best starting point for all technical tradingsystem testing and development.
The 4 Week Rule
The 4 week rule is used primarily for futures trading.The system based on the 4 week rule is simplicity itself:
1. Cover short positions and buy long whenever the priceexceeds the highs of the four preceding full calendar weeks.2. Liquidate long positions and sell short whenever the pricefalls below the lows of the four preceding full calendar weeks.
The system, as it is presented here, is continuous in nature,which means that the trader always has a position, either long orshort. As a general rule, continuous systems have a basic weakness.They stay in the market and get “whipsawed” during trendless marketperiods. It’s already been stressed that trend-following systems do notwork well when markets are in these sideways, or trendless phases.
* See BibliographyMoving Averages 217
The 4 week rule can be modified to make it noncontinu-ous. This can be accomplished by using a shorter time span—suchas a one or two week rule—for liquidation purposes. In otherwords, a four week “breakout” would be necessary to initiate anew position, but a one or two week signal in the opposite direc-tion would warrant liquidation of the position. The trader wouldthen remain out of the market until a new four week breakout isregistered.
The logic behind the system is based on sound technicalprinciples. Its signals are mechanical and clearcut. Because it istrend following, it virtually guarantees participation on theright side of every important trend. It is also structured to fol-low the often quoted maxim of successful trading—“let profitsrun, while cutting losses short.” Another feature, which shouldnot be overlooked, is that this method tends to trade less fre-quently, so that commissions are lower. Another plus is thatthe system can be implemented with or without the aid of acomputer.
The main criticism of the weekly rule is the same one lev-eled against all trend-following approaches, namely, that it doesnot catch tops or bottoms. But what trend-following systemdoes? The important point to keep in mind is that the four weekrule performs at least as well as most other trend-following sys-tems and better than many, but has the added benefit of incred-ible simplicity.
Adjustments to the 4 Week Rule
Although we're treating the four week rule in its original form,there are many adjustments and refinements that can beemployed. For one thing, the rule does not have to be used as atrading system. Weekly signals can be employed simply as anoth-er technical indicator to identify breakouts and trend reversals.Weekly breakouts can be used as a confirming filter for other tech-niques, such as moving average crossovers. One or 2 week rulesfunction as excellent filters. A moving average crossover signalcould be confirmed by a two week breakout in the same directionin order for a market position to be taken.218 Chapter 9
Shorten or Lengthen Time Periodsfor Sensitivity
The time period employed can be expanded or compressed in theinterests of risk management and sensitivity. For example, thetime period could be shortened if it is desirable to make the sys-tem more sensitive. In a relatively high priced market, whereprices are trending sharply higher, a shorter time span could bechosen to make the system more sensitive. Suppose, for example,that a long position is taken on a 4 week upside breakout with aprotective stop placed just below the low of the past 2 weeks. Ifthe market has rallied sharply and the trader wishes to trail theposition with a closer protective stop, a one week stopout pointcould be used.
In a trading range situation, where a trend trader wouldjust as soon stay on the sidelines until an important trend signalis given, the time period could be expanded to eight weeks. Thiswould prevent taking positions on shorter term and prematuretrend signals.
The 4 Week Rule Tied to Cycles
Earlier in the chapter reference was made to the importance of themonthly cycle in commodity markets. The 4 week, or 20 day,trading cycle is a dominant cycle that influences all markets. Thismay help explain why the 4 week time period has proven so suc-cessful. Notice that mention was made of 1, 2, and 8 week rules.The principle of harmonics in cyclic analysis holds that each cycleis related to its neighboring cycles (next longer and next shortercycles) by 2.
In the previous discussion of moving averages, it waspointed out how the monthly cycle and harmonics explained thepopularity of the 5, 10, 20, and 40 day moving averages. The sametime periods hold true in the realm of weekly rules. Those dailynumbers translated into weekly time periods are 1, 2, 4, and 8weeks, Therefore, adjustments to the 4 week rule seem to workbest when the beginning number (4) is divided or multiplied by2. To shorten the time span, go from 4 to 2 weeks. If an evenshorter time span is desired, go from 2 to 1. To lengthen, go fromMoving Averages 219
 
4 to 8. Because this method combines price and time, there’s noreason why the cyclic principle of harmonics should not play animportant role. The tactic of dividing a weekly parameter by 2 toshorten it, or doubling it to lengthen it, does have cycle logicbehind it.
The 4 week rule is a simple breakout system. The originalsystem can be modified by using a shorter time period—a 1 or 2week rule—for liquidation purposes. If the user desires a more sen-sitive system, a 2 week period can be employed for entry signals.Because this rule is meant to be simple, it is best addressed on thatlevel. The 4 week rule is simple, but it works.(Charting packagesallow you to plot price channels above and below current prices tospot channel breakouts. Price channels can be used on daily,weekly, or monthly charts. See Figures 9.11 and 9.12.)
 
pe2107 (TRO398) Treasury Bonds 03/98
 
Daily Bar Chart
20 Day Price Channel
 
 
 
 
 
 
 
Figure 9.11 A 20 day (4 week) price channel applied to Treasury Bondfutures prices. A buy signal was given when prices closed above the upperchannel (see circle). Prices have to close beneath the lower channel to reversethe signal.220 Chapter 9
 
(*SPX) S&P 500 Stock Index
 
Monthly Bar Chart
4 Month Price Channels
 
 
 
 
 
Figure 9.12 A 4 month price channel applied to the S&P 500 Index.Prices crossed the upper channel in early 1995 (see circle) to give a buy signalwhich remains in effect 3 years later. A close beneath the lower line is neededto give a sell signal.
TO OPTIMIZE OR NOT
The first edition of this book included the results of extensiveresearch produced by Merrill Lynch, which published a series ofstudies on computerized trading techniques applied to the futuresmarkets from 1978-82. Extensive testing of various moving aver-age and channel breakout parameters was performed to find thebest possible combinations in each futures market. The MerrillLynch researchers produced a different set of optimized indicatorvalues for each market.
Most charting packages allow you to optimize systems andindicators. Instead of using the same moving average in all mar-kets, for example, you could ask the computer to find the movingaverage, Or moving average combinations, that have worked thebest in the past for that market. That could also be done for dailyMoving Averages 221
and weekly breakout systems and virtually all technical indicatorsincluded in this book. Optimization allows technical parametersto adapt to changing market conditions.
Some argue that optimization helps their trading resultsand others that it doesn’t. The heart of the debate centers on howthe data is optimized. Researchers stress that the correct procedureis to use only part of the price data to choose the best parameters,and another portion to actually test the results. Testing the opti-mized parameters on “out of sample” price data helps ensure thatthe final results will be closer to what one might experience fromactual trading.
The decision to optimize or not is a personal one. Most evi-dence, however, suggests that optimization is not the Holy Grailsome think it to be. I generally advise traders following only ahandful of markets to experiment with optimization. Why shouldTreasury Bonds or the German mark have the exact same movingaverages as corn or cotton? Stock market traders are a differentstory. Having to follow thousands of stocks argues against opti-mizing. If you specialize in a handful of markets, try optimizing.If you’re a generalist who follows a large number of markets, usethe same technical parameters for all of them.
SUMMARY
We've presented a lot of variations on the moving averageapproach. Let’s try to simplify things a bit. Most technicians usea combination of two moving averages. Those two averages areusually simple averages. Although exponential averages havebecome popular, there’s no real evidence to prove that they workany better than the simple average. The most commonly useddaily moving average combinations in futures markets are 4 and9, 9 and 18, 5 and 20, and 10 and 40. Stock traders rely heavilyon a SO day (or 10 week) moving average. For longer range stockmarket analysis, popular weekly moving averages are 30 and 40weeks (or 200 days). Bollinger Bands make use of 20 day and 20week moving averages. The 20 week average can be converted todaily charts by utilizing a 100 day average, which is another use-222 Chapter 9
 
ful moving average. Channel breakout systems work extremelywell in trending markets and can be used on daily, weekly, andmonthly charts.
THE ADAPTIVEMOVING AVERAGE
One of the problems encountered with the moving average ischoosing between a fast or a slow average. While one may workbetter in a trading range market, the other may be preferable in atrending market. The answer to the problem of choosing betweenthe two may lie with an innovative approach called the “adaptivemoving average.”
Perry Kaufman presents this technique in his book SmarterTrading. The speed of Kaufman’s “adaptive moving average” auto-matically adjusts to the level of noise (or volatility) in a market.The AMA moves more slowly when markets are trending side-ways, but then moves more swiftly when the market is trending.That avoids the problem of using a faster moving average (andgetting whipsawed more frequently) during a trading range, andusing a slower average that trails too far behind a market when itis trending.
Kaufman does that by constructing an Efficiency Ratio thatcompares price direction with the level of volatility. When theEfficiency Ratio is high, there is more direction than volatility(favoring a faster average). When the ratio is low, there’s morevolatility than direction (favoring a slower average). By incorpo-rating the Efficiency Ratio, the AMA automatically adjusts to thespeed most suitable for the current market.Moving Averages 223
ALTERNATIVES TO THEMOVING AVERAGE
Moving averages don’t work all of the time. They do their bestwork when the market is in a trending phase. They’re not veryhelpful during trendless periods when prices trade sideways.Fortunately, there’s another class of indicator that performs muchbetter than the moving average during those frustrating tradingranges. They’re called oscillators and we'll explain them in thenext chapter. 
INTRODUCTION
In this chapter, we’re going to talk about an alternative to trend-following approaches—the oscillator. The oscillator is extremelyuseful in nontrending markets where prices fluctuate in a hori-zontal price band, or trading range, creating a market situationwhere most trend-following systems simply don’t work that well.The oscillator provides the technical trader with a tool that canenable him or her to profit from these periodic sideways andtrendless market environments.
The value of the oscillator is not limited to horizontal trad-ing ranges, however. Used in conjunction with price charts duringtrending phases, the oscillator becomes an extremely valuable allyby alerting the trader to short term market extremes, commonlyreferred to as overbought or oversold conditions. The oscillator canalso warn that a trend is losing momentum before that situation
225226 Chapter 10
becomes evident in the price action itself. Oscillators can signalthat a trend may be nearing completion by displaying certaindivergences.
We'll begin by explaining first what an oscillator is and thebasis for its construction and interpretation. We'll then discussthe meaning of momentum and its implications for market fore-casting. Some of the more common oscillator techniques will bepresented from the very simple to the more complicated. Theimportant question of divergence will be covered. We’ll touch onthe value of coordinating oscillator analysis with underlying mar-ket cycles. Finally, we’ll discuss how oscillators should be used aspart of the overall technical analysis of a market.
OSCILLATOR USAGE INCONJUNCTION WITH TREND
The oscillator is only a secondary indicator in the sense that itmust be subordinated to basic trend analysis. As we go throughthe various types of oscillators used by technicians, the impor-tance of trading in the direction of the overriding market trendwill be constantly stressed. The reader should also be aware thatthere are times when oscillators are more useful than at others.For example, near the beginning of important moves, oscillatoranalysis isn’t that helpful and can even be misleading. Toward theend of market moves, however, oscillators become extremelyvaluable. We’ll address these points as we go along. Finally, nostudy of market extremes would be complete without a discussionof Contrary Opinion. We’ll talk about the role of the contrarianphilosophy and how it can be incorporated into market analysisand trading.
Interpretation of Oscillators
While there are many different ways to construct momentumoscillators, the actual interpretation differs very little from onetechnique to another. Most oscillators look very much alike. Theyare plotted along the bottom of the price chart and resemble a flathorizontal band. The oscillator band is basically flat while pricesOscillators and Contrary Opinion 227
 
may be trading up, down, or sideways. However, the peaks andtroughs in the oscillator coincide with the peaks and troughs onthe price chart. Some oscillators have a midpoint value thatdivides the horizontal range into two halves, an upper and alower. Depending on the formula used, this midpoint line is usu-ally a zero line. Some oscillators also have upper and lower bound-aries ranging from 0 to 100.
General Rules for Interpretation
As a general rule, when the oscillator reaches an extreme value ineither the upper or lower end of the band, this suggests that thecurrent price move may have gone too far too fast and is due fora correction or consolidation of some type. As another generaltule, the trader should be buying when the oscillator line is in thelower end of the band and selling in the upper end. The crossingof the midpoint line is often used to generate buy and sell signals.We'll see how these general rules are applied as we deal with thevarious types of oscillators.
The Three Most Important Usesfor the Oscillator
There are three situations when the oscillator is most useful.You'll see that these three situations are common to most types ofoscillators that are used.
1. The oscillator is most useful when its value reaches anextreme reading near the upper or lower end of its bound-aries. The market is said to be overbought when it is near theupper extreme and oversold when it is near the lowerextreme. This warns that the price trend is overextendedand vulnerable.
2. A divergence between the oscillator and the price actionwhen the oscillator is in an extreme position is usually animportant warning.
3. The crossing of the zero (or midpoint) line can give impor-tant trading signals in the direction of the price trend.228 Chapter 10
 
(TR1600) Treasury Bonds 1600
 
 
10 Day Momentum
 
 
 
 
 
 
Figure 10.la The 10 day momentum line fluctuates around a zero line.Readings too far above the zero line are overbought, while values too farbelow the line are oversold. Momentum should be used in conjunction withthe trend of the market.
MEASURING MOMENTUM
The concept of momentum is the most basic application of oscilla-tor analysis. Momentum measures the velocity of price changes asopposed to the actual price levels themselves. Market momentumis measured by continually taking price differences for a fixedtime interval. To construct a 10 day momentum line, simply sub-tract the closing price 10 days ago from the last closing price. Thispositive or negative value is then plotted around a zero line. Theformula for momentum is:
M=V-v*
where V is the latest closing price and V* is the closing price xdays ago.Oscillators and Contrary Opinion 229
 
(TR1600) Treasury Bonds 1600
 
 
10 Day Momentum
 
 
 
 
 
 
 
Figure 10.1b A comparison of 10 and 40 day momentum lines. Thelonger version is more helpful in catching major market turns (see circles).
If the latest closing price is greater than that of 10 days ago(in other words, prices have moved higher), then a positive valuewould be plotted above the zero line. If the latest close is belowthe close 10 days earlier (prices have declined), then a negativevalue is plotted below the zero line.
While the 10 day momentum is a commonly used timeperiod for reasons discussed later, any time period can beemployed. (See Figure 10.1a.) A shorter time period (such as 5days) produces a more sensitive line with more pronounced oscil-lations. A longer number of days (such as 40 days) results in amuch smoother line in which the oscillator swings are lessvolatile. (See Figure 10.1b.)230 Chapter 10
Momentum Measures Rates ofAscent or Descent
Let’s talk a bit more about just what this momentum indicator ismeasuring. By plotting price differences for a set period of time,the chartist is studying rates of ascent or descent. If prices are ris-ing and the momentum line is above the zero line and rising, thismeans the uptrend is accelerating. If the up-slanting momentumline begins to flatten out, this means that the new gains beingachieved by the latest closes are the same as the gains 10 days ear-lier. While prices may still be advancing, the rate of ascent (or thevelocity) has leveled off. When the momentum line begins todrop toward the zero line, the uptrend in prices is still in force,but at a decelerating rate. The uptrend is losing momentum.
When the momentum line moves below the zero line, thelatest 10 day close is now under the close of 10 days ago and anear term downtrend is in effect. (And, incidentally, the 10 daymoving average also has begun to decline.) As momentum con-tinues to drop farther below the zero line, the downtrend gainsmomentum. Only when the line begins to advance again does theanalyst know that the downtrend is decelerating.
It’s important to remember that momentum measures thedifferences between prices at two time intervals. In order for theline to advance, the price gains for the last day’s close must begreater than the gains of 10 days ago. If prices advance by onlythe same amount as 10 days ago, the momentum line will be flat.If the last price gain is less than that of 10.days ago, the momen-tum line begins to decline even though prices are still rising. Thisis how the momentum line measures the acceleration or deceler-ation in the current advance or decline in the price trend.
The Momentum Line Leads the Price Action
Because of the way it is constructed, the momentum line is alwaysa step ahead of the price movement. It leads the advance ordecline in prices, then levels off while the current price trend isstill in effect. It then begins to move in the opposite direction asprices begin to level off.Oscillators and Contrary Opinion 231
 
The Crossing of the Zero Line as aTrading Signal
The momentum chart has a zero line. Many technicians use thecrossing of the zero line to generate buy and sell signals. Acrossing above the zero line would be a buy signal, and a cross-ing below the zero line, a sell signal. It should be stressed hereagain, however, that basic trend analysis is still the overridingconsideration. Oscillator analysis should not be used as anexcuse to trade against the prevailing market trend. Buy posi-tions should only be taken on crossings above the zero line ifthe market trend is up. Short positions should be taken oncrossings below the zero line only if the price trend is down.(See Figures 10.2a and b.)
 
(TR1600) Treasury Bonds 1600
 
Downtrend
 
40 Day Momentum
 
 
 
 
 
 
Figure 10.2a = The trendlines on the momentum chart are broken soonerthan those on the price chart. The value of the momentum indicator is thatit turns sooner than the market itself, making it a leading indicator.232 Chapter 10
 
(TR1600) Treasury Bonds 1600 oov06/o6|
|i Mw |st, I(yur lu
 
A214
re
jy[that 1
IfLat! big 80 Day Moving Average
 
 
40 Day Momentum
 
 
 
 
Caer es
 
Figure 10.2b Some traders regard a crossing above the zero line as abuy signal and a crossing below the line as a sell signal (see circles). Amoving average is helpful to confirm trend changes. The momentum linepeaked before the price (see arrows).
The Need for an Upper andLower Boundary
One problem with the momentum line, as it is described here, isthe absence of a fixed upper and lower boundary. It was stated ear-lier that one of the major values of oscillator analysis is being ableto determine when markets are in extreme areas. But, how high istoo high and how low is too low on the momentum line? Thesimplest way to solve this problem is by visual inspection. Checkthe back history of the momentum line on