03 Awesome oscillator (AO)

The Awesome Oscillator is used to measure trend momentum and to affirm trends or to anticipate possible reversals.

To calculate this index,

  1. For each time period, calculate the median price [(high + low)/2]
  2. Calculate a 5-period EMA of the median price.
  3. Calculate a 34-period EMA of the median price.
  4. Subtract the 5-period EMA from the 34-period EMA. This is called the Awesome Oscillator
Awesome Oscillator

Figure 8.4: Awesome Oscillator

When AO crosses above the Zero Line, short term momentum is now rising faster than the long term momentum. This can present a bullish buying opportunity.
Awesome Oscillator

Figure 8.5: Awesome Oscillator

AO twing peaks

Here the AO is used when two consecutive high peaks appears in the AO, with the later being lower than the former. This suggest that the trend is slowing down, coming to an end, and reversing (i.e., the lower second peak). This signal is used to short the stock.

In the opposite two low through, with the second being higher, signals a slow down of a downwards trend, and a likely reversal, and signal to buy.

See examples below.

AO twing peaks

Figure 8.6: AO twing peaks

AO crossing zero

When AO crosses, moves, above zero, it indicates an upward trends, and a signal to buy. When AO crosses below zero indicates a bear trend, and a signal to sell.

The problem with this strategy is that most common than not, it takes the trends halfway through.

AO crossing zero

Figure 8.7: AO crossing zero

AO Saucer

In this strategy, it is suggested to enter a buy trade after a reversal in AO, while AO is above zero. Basically, the bulls are winning, but the bears are fighting back. The reversal, indicates advance by the bulls, and one can capitalize in the expected uptrend.

In the opposite, a sell signal is indicated when AO is below zero, and there is a lower reversal in AO.

AO Saucer

Figure 8.8: AO Saucer