motivated by e-mail from Kenneth Goodrich**
It seems there's a new indicator that'll indicate when a stock is trending up or down, and ...
>A new indicator? How new?
It was developed by Tushar Chande in 1995 to determine whether a stock is trending or not and how strong the trend is.
>1995 is new?
Well ... new to me. Anyway, it's called the Aroon indicator.
("Aroon" means "Dawn's Early Light" in Sanskrit.)
It goes like this:
- Pick a time period, for example 10 days.
- Pick out the MAXimum and MINimum closing price over the past 10 days.
- If the MAX occurred M days ago, calculate:
Aroon(UP) = 100 (1 - M/10)
... it will be between 0 and 100
- If the MIN occurred N days ago, calculate:
Aroon(DOWN) = 100 (1 - N/10)
... it will also be between 0 and 100
>I assume there's a spreadsheet?
So, if Aroon(UP) is greater than, say, 70, then you might expect an upward trend.
If Aroon(DOWN) is greater than 70, then you might expect an downward trend.
That's illustrated in Figure 1.
>That's okay for 2-Feb or thereabouts. It does go DOWN. But what about ...?
What about 3-Mar, where it says UP?
T'ain't my indicator
Anyway, there's also an Aroon Oscillator, namely:
Aroon(Oscillator) = Aroon(DOWN) - Aroon(UP)
It'll be between -100 and 100.
Yes ... such as it is. It looks like this:
You pick a stock and some dates and download the stock prices.
Then you pick the number of periods (in cell B1) and the
UP and DOWN levels
(like "70", in cells D1 and G1) and you get a bunch of charts.
The chart of the closing price also indicates the prices where the UP and
DOWN levels are exceeded.
>And the oscillator?
It's in the lower chart. Look for it.
>And you guarantee the accuracy of the spreadsheet??
VGTSX is a Vanguard International Fund.
You kidding? Just play with it
Just click on the picture of the spreadsheet (or, if'n that don't work, RIGHT-click and Save Target ...).
Here are a few more examples, using a 10 day time period and aroon levels at 70, over a time interval ending in June, 2005.
Blue indicates an UPtrend.
Red indicates a DOWNtrend.
P.S. You can also play here
Kenneth has a Word document describing his use of the Aroon Indicator, here.