Thrust Oscillator Waning

07/31/03 10:11:21 AM

by Arthur Hill

While the Nasdaq Composite plows higher, the Thrust Oscillator (TO) formed a bearish divergence and continues to weaken.

Security: Nasdaq
Position: N/A

The Thrust Oscillator is another measure of breadth and correlates closely with the TRIN. A 22-day EMA was applied to smooth the data and focus on the medium-term trend (see below for calculation details and rational behind the 22-day EMA).

The Thrust Oscillator's 22-day EMA advanced from mid-March to early June. During this time frame, the indicator recorded a series of higher highs and higher lows to confirm underlying strength in the Nasdaq Composite. The indicator peaked in early June (black arrow) and then broke below the trendline extending up from mid-March. Notice that the indicator found support at the zero line (green arrow) and this level represents the final bullish threshold.

Graphic provided by: MetaStock.

While the Nasdaq Composite went on to a new reaction high in early July, the Thrust Oscillator's 22-day EMA formed a lower high and bearish divergence (red line). This lower high failed to confirm the recent high in the Nasdaq Composite and suggests diminished buying pressure. The subsequent pullback extended back to the zero line where the indicator found support with another bounce. Also notice that the actual Thrust Oscillator peaked on July 2nd and formed a series of lower highs over the last few weeks (red arrow).

The indicator's bearish divergence serves as a warning, but the overall trend remains up for the Nasdaq Composite. The trendline extending up from mid-March has been touched five times and the index has yet to break this important support level. The bearish divergence in the Thrust Oscillator's 22-day EMA serves as a warning, but would not be confirmed unless the indicator moves below zero. A trendline break in the Nasdaq Composite with confirmation by this indicator would be most negative.

Note on Thrust Oscillator Construction and Moving Average.

Developed by Tushar Chande, the Thrust Oscillator is another way of calculating the TRIN. The TRIN fluctuates from zero to infinity. Readings from 0 to 1 reflect buying pressure and readings from 1 to infinity reflect selling pressure. As such, the TRIN is asymmetric and difficult to compare bullish and bearish extremes. In contrast, the TO fluctuates between -1 and +1. Readings from -1 to 0 reflect selling pressure and readings from 0 to +1 reflect buying pressure. David Hawkins took the concept one step further by applying a 22-day moving average for medium-term analysis.

The formulas are as follows:

Advancing Issues = AI
Declining Issues = DI
Volume of Advancing Issues = AV
Volume of Declining Issues = DV

TRIN = (AI/DI)/(AV/DV)

TO = (AI x AV - DI x DV) / (AI x AV + DI x DV)

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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