After bottoming on April 3, the DJIA’s Price Oscillator has been making a bumpy up move. That is important because bumpiness or smoothness of a move carries important information.
Our Price Oscillator is calculated using the same math as the McClellan A-D Oscillator, by finding a difference between two exponential moving averages (EMAs). The difference for the Price Oscillator is that it uses closing prices rather than daily A-D differences. See this link for details on the calculations.
A bumpy Price Oscillator is a sign of weakness for the direction of travel in which it is seen. That weakness may not manifest itself right away, but the message persists. A smooth Price Oscillator move is a sign of strength for the direction of travel in which it is seen. That strength may yield for a brief time to some corrective movement, but the message remains until it is contradicted by new information.
Here is a chart from 2006-10 which helps to illustrate this point:
During the uptrend to the 2007 market top, we saw a succession of Price Oscillator movements that were smooth up, bumpy down. That conveyed the message that the bulls were on the strong side. But that changed right after the October 2007 final price top to a smooth down, bumpy up pattern.
That finally changed in early 2009, when there was a rather bumpy down move in the Price Oscillator to the final price low in March 2009. That low was followed by a really strong price rally, which featured a smooth up move by the Price Oscillator. The message then had changed.
Sometimes making an interpretation can be hard. Does one momentary bump invalidate a smooth move? As with all other types of chart analysis, this technique is not perfect and easy all the time.
For the current Price Oscillator up move, its bumpiness does not tell us exactly when the bears are going to take charge again. What it does say is that the bulls’ hearts are not really in this rally, and the bulls are not organized enough to make a nice smooth up move. That should matter very soon.