Monday, July 23, 2012

The Detrending Price Oscillator

MetaStock SPRS Series - Week 78 - TechniTrader® Stock Discussion for MetaStock Users - The Detrending Price Oscillator - July 23, 2012
By: Martha Stokes C.M.T.

The Detrending Price Oscillator is a unique indicator that has a primary purpose of detrending aka removing the trend, from a stock price chart to reveal the underlying cyclical pattern.

Companies and the stock market have cycles of various timelines and magnitude. Just as in nature, cycles are important data that can help traders identify cycles which aids in understanding price behavior and future price action.

Cycles include the DPO, cycle analysis, cycle deviations, major disruptive cycle forces, etc. and is a huge topic. Today we are going to cover one small aspect of the vast cycle analysis theory I work on continually.

Chart 1

This cycle analysis is based on a 16 period weekly DPO setting. It is designed to first determine if there is a cycle within the price trend or not. AAPL does have a cycle.

Cycle lengths are typically determined by the trough to trough timeframe not the peak to peak timeframe. By incorporating this rule, cycle analysis maintains an integrity that is reliable and accurate.

What we see in the AAPL cycle is very consistent, shorter cycles for AAPL between the years 2008-2010. The cycle shifts at that point and becomes more intensified with higher peaks and lower troughs, but maintains the timeframe reasonable well for a cycle.

Please remember that mild variations of cycle peak, trough, and timeline are normal. Variations that are mild are of less concern.

However in 2012 the trough lengthened, extending the trough timeline and then a major extended peak formed. This is a major deviation of the cycle and its timeline. The typical reaction to an extended peak is an extended trough, which totally skews the timeline destroying the integrity of the prior cycle timeline.

Whenever there is a major deviation to a cycle, traders should be alert to the significance. When cycles deviate to this extent the cycle will not function properly for years, or may never return to its original cycle pattern and timeline.

AAPL has experienced a major extended peak cycle deviation followed by an extended trough. Therefore, the empirical evidence from DPO is that AAPL’s business cycle has changed hugely. The shift is a massive alteration of the cycle.

With this information, traders can begin to assess AAPL’s trendline patterns and price action with a new perspective. This is not some minor variation, and it warns of continued cycle deviations yet to come.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner

©2012 Decisions Unlimited, Inc.

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1 comment:

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