Today had some indexes breaking out, the DOW to a record high and the S&P to a six year high. The Russell 2000 tried with a nice early rally, but then went flat in a narrow range for the rest of the day.

Unless you are trying to catch very small moves, today would have been full of whipsaws as you kept expecting the market to continue (or reverse) the early trend. And looking at the wrong indicator can give you signals that are not reflected in price.

Comparing Oscillators

You’ll usually see a Stochastic oscillator at the bottom of my charts, and I use it for both timing and directional information. The Stochastic is what is called a “normalized” oscillator, meaning that it will keep going back and forth between zero and 100, even if the price swings become very small.

That works well if the market is moving in tradable swings, but can give you a false impression of what is happening in a narrow sideways market. Look at the Stochastic (bottom) with the MACD (Moving Average Convergence Divergence) oscillator above it.

The MACD is constructed by taking the difference between two moving averages. Compare its rise and fall with the separation of the moving averages I keep on my price chart. (It won’t match exactly, because the moving average lengths are not the same.) After you’ve watched them long enough, you can actually get equivalent information from either, but some find the MACD easier to read.

The MACD is not “normalized,” meaning it has no arbitrary limits to its up and down moves. But this also means that, being smoother, it sometimes gives you less detailed information. That’s why many traders like to keep an eye on both types of oscillators.

Their differences are most apparent when the market is going sideways. When the market becomes less and less volatile, the MACD starts to stay very close to the zero line, while the Stochastic keeps giving overbought and oversold signals.

After todays early rally, the sooner you decided there was no tradable movement the better. And using the MACD (or carefully watching the moving averages) was the easiest way to stay out of trouble.

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