the hAndbook of technIcAl AnAlysIswhen a new low is indicated by the price channel. It really depends on the market
chosen, trading strategy selected, and tradesizing method employed.
It is interesting to note that the stochastic oscillator, price channel, and Aroon
indicators may be set up to signal the same sell and buy indications as if all the
lookback periods were identical. A 20‐period raw %K setting on the stochastic will
signal a reading of nearly 100 percent should the current price represent the highest
price over the last 20 periods. A lookback setting of 20 periods on the price channel
will signal a new high should prices exceed the highest high of the last 20 periods.
(Note that price channels do not account for the current price and hence are able
to signal breakouts.) Finally, the Aroon Up indicator with the same lookback pe-
riod will have a reading of 100 percent if the current price is the highest price over
the last 20 periods and zero if it is the lowest. The reverse is true for the Aroon
Down indicator. The Aroon Down indicator with the same lookback period will
have a reading of 100 percent if the current price is the lowest price over the last
20 periods and zero if it is the highest. Figure 12.28 depicts the identical matching
buy signals from all three indicators. This combination of indicators and oscillators
represents the highest level of multicollinearity. As such, confirmation of the new
price channel breakouts via the Aroon Up and Stochastics Oscillator are therefore
redundant or superfluous as all three indicators are mathematically constructed to
give virtually identical signals over the same lookback period.
Figure 12.28 Multicollinearity on the Daily Chart of Google Inc.
Courtesy of Stockcharts.com