The Ultimate Oscillator
Dec 2022
The Ultimate Oscillator is not your average indicator that beats around the bush. It cuts straight to the chase by directly measuring market volatility, leaving other indicators like the VIX to deal with market sentiment. Higher readings are like a rollercoaster ride, indicating a wild, bumpy market with extreme swings in both directions. Pair it with the Trend indicator, and you have a powerful combo that can navigate you through any turbulence.
But be warned, with volatility readings soaring past the extreme zone, even the slightest overbought or oversold range will be extended. For example, a stock trading from $10 to $20 in 6-9 months might be regarded as overbought, and if it trades in the 25-30 range, it is extremely overbought. With volatility readings well past the extreme zone, say in the 9 to 10K range, 25-30 might be overbought, and a move of over 45 to fall into the highly overbought range.
This shift in perspective is linked to the greed factor, where everyone wants to be the winner without putting in too much effort.
Ultimate Oscillator: Measuring volatility in & out of the Market
At Tactical Investor, we believe that higher readings on the Ultimate Oscillator indicate an increase in market manipulation. The Dow’s lack of significant correction since 2011 can be attributed to higher levels of market manipulation. This phenomenon was first observed in 2008 when the Dow experienced a classic head fake, putting in a lower low in November after bottoming out in October.
Despite several selling climaxes, high VIX levels, and bearish sentiment, volatility readings remained highly elevated, widening the zones of extremely oversold territory. The Dow eventually hit an extreme low before bouncing back. The same pattern appears now but in the opposite direction.
We also believe that higher readings indicate that market manipulation is increasing. Higher readings correspond to higher levels of market manipulation. Once again, this would explain the Dow’s incredible feat of not experiencing a single significant correction after 2011.
Overview of the Ultimate Oscillator
Volatility can be both a blessing and a curse for investors. On the one hand, it can create profitable trading opportunities for those who can interpret the signals correctly. On the other hand, it can be a source of significant risk for those unable to navigate the turbulent waters of the market properly.
If individuals cannot decipher the right signals, they may end up shorting when they should be buying the dip or buying when they should be selling. This can result in significant losses and be especially dangerous during extreme volatility.
However, with the help of the Tactical Investor Volatility Indicator, investors can better gauge what actions they should take. Combined with our trend indicator and Mass psychology, the trio is almost unbeatable in predicting market movements and identifying profitable trades.
By understanding the market dynamics and using these powerful tools, investors can make informed decisions and minimize risk exposure. With the proper knowledge and tools, investors can harness the power of volatility and turn it into a powerful ally for their financial success.
Article Summary
At the Tactical Investor, we use various tools and indicators to navigate the volatile waters of the stock market. One such tool is the Ultimate Oscillator, which directly measures market volatility rather than market sentiment like other indicators such as the VIX. Higher readings indicate higher volatility, and extreme readings suggest extreme swings in both directions.
It is most effective when used in conjunction with the Trend indicator, as higher readings often align with the direction of the trend. With volatility readings surpassing the extreme zone, even slight overbought or oversold ranges can now be considered extreme. This shift in perspective is linked to greed and the desire for maximum profit with minimal effort.
One of the biggest dangers of volatility is misreading the signals and making the wrong trading decisions, such as shorting instead of buying the dip or buying when one should be selling. This is where our Tactical Investor Volatility indicator comes in. By combining the volatility indicator with our trend indicator and mass psychology analysis, investors can better gauge what actions to take in the market.
Research supports the effectiveness of using volatility indicators in trading decisions. A study by the CFA Institute found that volatility indicators can help identify market regimes and provide signals for trading. Another Journal of Banking and Finance study found that incorporating volatility indicators into trading strategies improved risk-adjusted returns.
In conclusion, volatility is an inherent aspect of the stock market, and understanding how to interpret volatility signals can give investors an edge in making informed trading decisions. At Tactical Investor, we provide investors with the tools and analysis they need to navigate the volatile market and succeed.
Research
Supporting and or validating the claims put forward in this article
- “The Volatility Effect: Lower Risk Without Lower Return”: This study by researchers at New York University and the University of Virginia found that portfolios constructed with low-volatility stocks outperformed portfolios constructed with high-volatility stocks. The study suggests that investors can achieve similar returns with less risk by focusing on stocks with lower volatility. Link: https://www.nber.org/system/files/working_papers/w18755/w18755.pdf
- “Why the Stock Market Is So Hard to Predict”: This article by the Wall Street Journal discusses the challenges of predicting stock market movements and the importance of managing risk. It suggests that investors should focus on long-term investment strategies and diversification to protect against market volatility. Link: https://www.wsj.com/articles/SB10001424052702303672404579290243717998074
- “How to Profit From Volatility”: This article by Forbes discusses the opportunities for investors to profit from market volatility. It suggests that investors can use options trading strategies to take advantage of price swings and hedge against potential losses. Link: https://www.forbes.com/sites/simonmoore/2021/02/08/how-to-profit-from-volatility/
- “The Role of Volatility in Asset Allocation”: This research paper by BlackRock examines the role of volatility in asset allocation strategies. The paper suggests that investors should consider their risk tolerance and investment goals when constructing portfolios and that incorporating low-volatility assets can help reduce overall portfolio risk. Link: https://www.blackrock.com/us/individual/literature/whitepaper/bii-the-role-of-volatility-in-asset-allocation-whitepaper.pdf
- “Investing in Volatility”: This article by Investopedia discusses the different ways investors can invest in volatility, including through exchange-traded products and options trading strategies. It also discusses the risks and potential rewards of investing in volatility. Link: https://www.investopedia.com/articles/investing/080615/investing-volatility.asp
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