Using the PPO to Measure Extremes

Q: How can you show the difference between the closing price and the moving average?

A: The Percentage Price Oscillator (PPO) is a percentage version of MACD. In this example, I will show how to use the PPO to show the percentage difference between the closing price and a moving average. In the indicator settings below, we can see a 40-week exponential moving average along with the Percentage Price Oscillator (PPO) set at (1,40,1). This PPO setting will show the percentage difference between the 1-period EMA and the 40-period EMA. A 1-period EMA is the same as the closing price for a security. With this setting we can look for extremes or when the price extends too far from its moving average. This is equivalent to an overbought or an oversold reading.

On the SPY chart example, the pink dotted line is the 40-week EMA and the black solid line is the closing prices. Notice how the PPO is positive when SPY is above the 40-week EMA and PPO is negative when SPY is below the 40-week EMA. While extremes do not occur often when using a 40-week EMA, there are 3-4 negative extremes since October. With the sharp declines in October, November and March, SPY traded over 30% below its 40-week moving average. These levels represented extremes or the equivalent of oversold conditions. Traders can also use daily charts and shorter moving averages to look for short-term extremes.

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