What it is and what it shows
The Ultimate Oscillator measures the buying pressure to ascertain whether a stock is being accumulated or distributed. It contrasts buying pressure to the stock’s true range, which offers a more accurate depiction of the market’s movements.
The formula for the Ultimate Oscillator is a bit involved:
UO = 100 x (BP7 + BP14 + BP28) / (TR7 + TR14 + TR28)
Where:
- BP is Buying Pressure, calculated as close minus the lesser of the low or the previous close.
- TR is the True Range, which is the greatest of:
- Current High minus current Low
- The absolute value of the current High minus the previous Close
- The absolute value of the current Low minus the previous Close
The values 7, 14, and 28 are typical time periods used.
How to trade it
- Divergences: A bullish divergence occurs when prices form a new low while the Ultimate Oscillator does not. Conversely, a bearish divergence appears when prices set a new high, but the oscillator does not follow suit. Such divergences can indicate a potential trend reversal.
- Overbought and Oversold Conditions: Common thresholds are set at 70 for overbought and 30 for oversold, although these can vary. A buy signal might be given when the oscillator falls below 30 and then rises back above it. Similarly, a sell signal could be signaled when the oscillator surpasses 70 and then drops back below.
- Bullish Buy and Bearish Sell Signals: Larry Williams, the creator, provided a complex method for interpreting buy and sell signals based on the interaction of the oscillator with these overbought and oversold thresholds, coupled with divergences. For instance, for a buy signal:
Example: If a stock hits a new low but the Ultimate Oscillator remains above its prior low, this might hint at a looming bullish divergence.
Example: If the oscillator dives to 28 and then rebounds to 32, it could be construed as a buy signal.
– The oscillator falls below 30.
– A bullish divergence is confirmed.
– The oscillator rises above the divergence high.
These conditions, though specific, can offer high probability trade opportunities when met.