Lately I've been reading the book "Martin Pring on Market Momentum", and excerpts from Constance Brown's book "Technical Analysis for the Trading Professional".
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Mr. Pring is truly an expert on the subject of momentum indicators - all kinds of momentum indicators. Ms. Brown is the inventor of the Derivative Oscillator, which is one of the indicators freely available for our use at FreeStockCharts.
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One of the things Mr. Pring talks about in his book is the good fortune one experiences when standard price movement patterns are found not on the movement of price, but rather on the momentum indicator itself.
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But he laments that even using his favorite momentum indicator, the Rate of Change (ROC), these kind of familiar patterns do not occur very often. Indeed, their appearance is rather rare.
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Ms. Brown does an excellent job in her writing to not explain how her Derivative Oscillator indicator works. I do know that the indicator is some kind of tripled smoothed concoction of the RSI indicator, and that's about it. Anyway, one thing I admire about this indicator's output is the clarity and unambiguity of its signals, as well as the characteristically symmetrical output of its readings.
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Now enter yours truly (that would be me, of course), always curious, always trying to look at things with a fresh angle. And always looking for an edge!
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What if a person combined the idea of the infamous Mr. Pring, namely that patterns found on momentum indicators can be useful for trading, with the signal clarity and strongly symmetrical characteristics of Ms. Brown's mysterious momentum indicator - the Derivative Oscillator?
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Good question. Hummmm....... I'm sure no one has thought of this before.
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Well, how about we choose the familiar inverted head and shoulders price pattern, just for giggles. Do you suppose we can find that pattern to occur on the Derivative Oscillator? And if it does, is Mr. Pring correct in claiming that its occurrence should yield a valuable trading signal?
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Let's find out, shall we? LOL
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What follows are 13 daily charts with the Derivative Oscillator used in the prescribed (14,5,3,9) configuration of Ms. Brown. Where I found indications of the bullish inverted head and shoulders pattern, it is noted with a 'ls' for left shoulder, 'h' for head and 'rs' for right shoulder.
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Additionally, I have attempted to highlight with hot pink the corresponding area of the indicated buy and sell signal (buy after the oscillator bottoms at the right shoulder and below ZERO, sell when the oscillator peaks above ZERO).
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If after examining these 13 charts you are interested in researching this indicator further with me, please send me an email at: tsiTrader@gmail.com
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Be sure you look at the last chart. It's GDXJ - the Junior Gold Miners ETF.
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Still just barely on a BUY signal
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Just signaled a SELL signal.
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Still just barely on a BUY signal
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Still active BUY signal
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Still active BUY signal
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Barely, but still active BUY signal
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Brand New BUY Signal!
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Very interesting. It seems this 'head and shoulders' momentum idea works primarily with mining stocks and not so much with more typical companies.
ReplyDeleteI like the derivative oscillator.. I've been using MACD as a secondary technical indicator but I think I'll replace it with this.