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AROON


Aroon Interpretation

11/18/11 09:23:15 AM
by Alan R. Northam

The Aroon indicator is interpreted.

Security:   .DJI
Position:   N/A

Figure 1 shows the template, written for MetaStock, with the Dow Jones Industrial Average (DJIA) daily trading bars. The template includes a red ribbon indicating bearish periods and a green ribbon indicating periods of bullishness. The template also includes the Aroon indicator below the price chart and the Aroon oscillator below the Aroon indicator. To the left, the template shows the commentary that interprets and explains the signals generated by the Aroon indicator.

FIGURE 1: AROON. Aroon template showing price bars with buy and sell signals, the Aroon indicator, the Aroon oscillator, and commentary.
Graphic provided by: MetaStock.
 
The Aroon indicator is made up of two separate indicators, the Aroon up indicator and the Aroon down indicator. To interpret the Aroon indicator, there are three conditions involving the Aroon up indicator and the Aroon down indicator to look for: crossovers, levels less than 30 and levels greater than 70, and parallel movement.

Crossovers occur; then either the Aroon up indicator crosses above the Aroon down indicator or the Aroon down indicator crosses above the Aroon up indicator. When the Aroon up indicator crosses above the Aroon down indicator, it signals an uptrend and when the Aroon down indicator crosses above the Aroon up indicator, a downtrend is signaled.

When, for example, the Aroon up indicator crosses above the Aroon down indicator, an uptrend is indicated. This trend is considered strong when the Aroon up indicator is above 70 and the Aroon down indicator is below 30. The uptrend is considered to be weak when either the Aroon up indicator is less than 70 or the Aroon down indicator is greater than 30.

When the Aroon down indicator is above the Aroon up indicator, a downtrend is indicated. A strong downtrend is indicated when the Aroon down indicator is above 70 and the Aroon up indicator is below 30. A weak downtrend is indicated when Aroon down indicator is less than 70 or the Aroon up indicator is greater than 30.

Parallel movement occurs when both the Aroon up indicator and the Aroon down indicator move parallel to each other and are close in value to each other. Parallel movement indicates a period of price consolidation. The weakness in the Aroon indicator is in the interpretation of consolidation periods. There are no hard rules in the interpretation of parallel movement as to how closely the parallel movement between the Aroon up and the Aroon down indicators must be to qualify as a signal that identifies periods of consolidation. Thus, the interpretation of periods of consolidation is left to the imagination of the analyst.


In Figure 1, I have shown the daily trading bars as green when the Aroon up indicator is above the Aroon down indicator, the Aroon up indicator is above 70, and the Aroon down indicator is below 30, indicating a strong uptrend. I have also shown the daily bars in red when the Aroon down indicator is above the Aroon up indicator, the Aroon down indicator is above 70, and the Aroon up indicator is below 30, indicating a strong downtrend. The black daily trading bars indicate either weak downward or weak upward trends. Buy signals are generated when the Aroon up indicator crosses above the Aroon down indicator and sell signals are generated when the Aroon down indicator crosses above the Aroon up indicator.

The commentary shows that a sell signal has been given and explains that the Aroon down indicator has crossed above the Aroon up indicator. Below the sell signal is the interpretation of the sell signal that states that the trend is down but weak. The commentary goes on to explain why the trend is weak by stating that the Aroon up indicator is either greater than 30 or the Aroon down indicator is less than 70. Looking at the indicator window, we note that the latter is the case; "the Aroon down indicator is less than 70."

The Aroon oscillator measures the difference between the Aroon up indicator and the Aroon down indicator and is shown as a histogram. When this indicator is above zero, it indicates an uptrend and the histogram bars are shown in green. When this indicator is below zero, it indicates a downtrend and the histogram bars are then shown in red.

A copy of the Aroon template is distributed free upon request.



Alan R. Northam

Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at inquiry@tradersclassroom.com or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.

Garland, Tx
Website: www.tradersclassroom.com
E-mail address: inquiry@tradersclassroom.com

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