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The Ultimate Oscillator is a tool for the analysis of stocks that attempts to properly gauge the momentum of a particular stock's movement. Created by Larry Williams in 1976, it differs from many methods of momentum analysis by including the stock figures for three different time periods. By including the different time periods and weighting them according to how recent they are, the Ultimate Oscillator can avoid some of the false signals sent out by more narrow predictors. Buy signals are sent out by the oscillator when it shows a bullish divergence, which means that the oscillator forms a higher low total than the price of the stock.
Many methods of technical stock analysis created by investment experts promise the ability to predict the future movement of stock prices based on past performance. A drawback to some of these techniques may be that they encompass just a single time period, omitting past price information that can be relevant to future movement. The Ultimate Oscillator attempts to avoid this pitfall by widening the scope of information included to try to get a complete picture of stock price momentum.
There are two main components which make up the equation at the heart of the Ultimate Oscillator. "Buying pressure," which measures price direction, is calculated by subtracting the minimum price, which can be either the lowest price the stock hit in the day being measured or, if lower, the previous day's closing price, from the closing price of the day being measured. "True range," which determines the distance of a stock movement, is reached by subtracting the minimum price from the maximum price reached on the day being studied. Again, the previous day's closing price may be used for either of those totals if it is more extreme.
Once 28 days of price information have been gathered, the Ultimate Oscillator can be reached. First, averages for three time periods, 7-day, 14-day, and 28-day, are calculated. This is done by adding up the sum of the Buying Pressure totals and dividing that by the sum of the True Range totals for that same time period.
The final step to the Ultimate Oscillator calculation is adding up the weighting averages. In this process, the 7-day average is multiplied by 4, the 14-day average is multiplied by 2, and the 28-day average is kept as it is. These totals are added, divided by 7, and then multiplied by 100. If this total is below 30, and there is less downward momentum in the oscillator total than in the price of the stock, a bullish divergence is occurring and the stock should be purchased.