How to Use and Interpret a Center Line Oscillator - Candlestick Patterns Explained by TechniTrader®

Moves in Opposition to Price During Volatile Market Conditions

Most Technical and Retail Traders are familiar with high and low range oscillators or what is often called an Overbought or Oversold Oscillator. However, few really understand or use a Center Line Oscillator, which is extremely useful during Volatile Market Conditions when large to giant-lot Stock Market Participant Groups are trading the opposite side of the market from smaller-lot Stock Market Participant Groups which is what creates volatility most of the time.

See the candlestick chart example below.

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Understanding the relationship between the larger-lot institutional activity and the small-lot activity of the retail crowd helps guide traders toward trading with the larger lots rather than against them. This reduces whipsaw losses, weaker trades, and frustration.

At all times, Technical and Retail Traders should know which Stock Market Participant Groups are in control of price, as this information relates to how price will behave in the near term for Intraday Trading, Day Trading, Swing Trading, and Position Trading.

The Chaikin Oscillator (ChiOsc) is a Center Line Oscillator, and it has the ability to move in opposition to price. This is one of the key benefits of any oscillator that uses a center line. When using these oscillators, Technical Analysts are not looking at Overbought vs. Oversold conditions of price on the Short-Term or Daily Trend.

The use of a center line in an oscillator indicator is to determine and reveal whether the power behind the price action is on the buy side or the sell side. This creates a negative divergence whenever the larger to giant-lot Stock Market Participant Groups are trading the opposite side of a trade from the Retail or Smaller-Lot Traders.

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The stock chart provided above is an excellent example of how this indicator can warn early that larger to giant lots are selling down.

This was actually Dark Pool Quiet Rotation™ activity, which is marked with the red line-drawn box, when smaller lots and High Frequency Trading speculation drove price upward on declining stock Volume. Large and giant institutions were consistently and steadily rotating out, slowly and regularly selling shares as smaller lots were buying on what they assumed was merely a dip.

Dark Pool Quiet Rotation patterns from large and giant-lot institutions’ selling are very tough to see unless you use indicators that move contrarily to price. Most Momentum Price Indicators move in harmony with price, lagging slightly behind it.

The ChiOsc indicator with a standard StockCharts.com setting and an Exponential Moving Average (EMA) to aid in the interpretation clearly shows that larger to giant lots were selling into the retail crowd rally. In other words, the larger and giant funds wanted to sell inventory they held to reduce their risk, as the company financials indicated a business cycle contraction. They hid their selling by waiting, and then they started steady Time Weighted Average Price (TWAP) rotation automated orders, which triggered regularly as price moved upward.

It is clear to see that the ChiOsc indicator is moving down while price is moving up, which is a huge negative divergence. When Technical and Retail Traders are able to use a Center Line Oscillator Indicator properly, they can improve their profitability and consistency of success trading stocks short-term.

Summary

Understanding why a rally fails is important. This rally was never going to succeed, and here are the reasons why:

Stock Volume declined as price moved upward.
Smaller lots, not larger to giant lots, were moving price up.
Giant Funds were selling into the rally regularly.

Adding a couple of additional stock indicators to your favorites can dramatically improve your trading results.

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Trade Wisely,

Martha Stokes CMT

TechniTrader technical analysis using a StockCharts chart, courtesy of StockCharts.com

Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses