Window Oscillators and Overlay Indicators
on when price tests it. The more time has elapsed, the higher will be the trendline
support level when tested by price. Trendlines are a form of geometrically based
overlay indicators. Unfortunately, geometrically based overlays are the only group
of indicators that are not scale invariant. Forecasted prices vary with the scaling
employed. For example, two trendlines based on different scaling would forecast
different future support and resistance levels.
In Figure 8.3, we see that for uptrend lines, ratio scaling produces earlier pen-
etrations as compared to linear scaling. The compression that occurs at higher
prices on ratio‐scaled charts affects the angle of all trendlines, which are based on
the geometrical relationship between inflection points.
In short, scaling does not impact the forecasts of potential future price barrier
levels if the overlay indicator is numerically, horizontally, or algorithmically based.static and Dynamic Overlay Indicators
Finally a distinction has to be made between static and dynamic overlay indicators
and their relationship with numerically, horizontally, geometrically, and algorith-
mically based overlay indicators. Static overlay indicator forecasts are not depen-
dent on the time element, and as such include all horizontally and algorithmically
based overlays, as well as many numerically based overlays. The forecasted price
reaction level does not change over time, unless it is invalidated and a new forecast
is required. Hence all horizontal overlay indicators like support and resistance are
clearly static overlay indicators. Static overlays include:fIgure 8.3 Geometrically Based Overlays Displaying Non‐Scale Invariance.
Courtesy of Stockcharts.com