Ultimate Oscillator

Overview

Oscillators typically compare a security’s smoothed price with its price x-periods ago. Larry Williams noted that the value of this type of oscillator can vary greatly depending on the number of time periods used during the calculation. Thus, he developed the Ultimate Oscillator that uses weighted sums of three oscillators, each of which uses a different time period.

The three oscillators are based on Williams’ definitions of buying and selling “pressure.”

Interpretation

Williams recommends that you initiate a trade following a divergence and a breakout in the Ultimate Oscillator’s trend. The following text sumarizes these rules.

Buy when:

A bullish divergence occurs. This is when the security’s price makes a lower low that is not confirmed by a lower low in the Oscillator.
During the bullish divergence, the Oscillator falls below 30.
The Oscillator then rises above the highest point reached during the span of the bullish divergence. This is the point at which you buy.

Close long positions when:

The conditions are met to sell short (explained below), or
The Oscillator rises above 50 and then falls below 45, or
The Oscillator rises above 70. (I sometimes wait for the oscillator to then fall below 70.)

Sell short when:

A bearish divergence occurs. This is when the security’s price makes a higher high that is not confirmed by a higher high in the Oscillator.
During the bearish divergence, the Oscillator rises above 50.
The Oscillator then falls below the lowest point reached during the span of the bearish divergence. This is the point at which you sell short.

Close short positions when:

The conditions are met to buy long (explained above), or
The Oscillator rises above 65, or
The Oscillator falls below 30. (I will sometimes wait for the oscillator to then rise above 30.)

Example

The following chart shows Autozone and its Ultimate Oscillator.

 

 

I drew “sell” arrows when the conditions for a sell signal were met:

A bearish divergence occurred (lines “A”) when prices made a new high that was not confirmed by the Oscillator.
The Oscillator rose above 50 during the divergence.
The Oscillator fell below the lowest point reached during the span of the divergence (line “B”).

Similarly, I drew “buy” arrows when the conditions for a buy signal were met:

A bullish divergence occurred (lines “C”) then prices made a new low that was not confirmed by the Oscillator.
The Oscillator fell below 30 during the divergence.
The Oscillator rose above the highest point reached during the span of the divergence (line “D”).