Window Oscillators and Overlay Indicators
■ (^) Standard bearish divergence between price and the oscillator is a bearish setup
awaiting price confirmation. It is represented by higher peaks in price being accom-
panied by lower peaks in the oscillator. A potential downside reversal is expected.
■ (^) Reverse bullish divergence between price and the oscillator is a bullish setup
awaiting price confirmation. It is represented by higher troughs in price being
accompanied by lower troughs in the oscillator. A potential upside continua-
tion is expected.
■ (^) Reverse bearish divergence between price and the oscillator is a bearish setup await-
ing price confirmation. It is represented by lower peaks in price being accompanied
by higher peaks in the oscillator. A potential downside continuation is expected.
(For George Lane’s Bull and Bear setups, refer to Chapter 9.) In Figure 8.10,
we observe bullish and bearish divergences forecasting potential reversals with un-
canny accuracy on the daily GBPUSD chart. Please refer to Chapter 9 for more on
divergence. Note that although divergence can also be indentified between oscillators,
it is the divergence between price and an oscillator that is regarded as more pertinent.
Figure 8.11 displays various divergences between the S&P500 Large Cap In-
dex and both the S&P Bullish Percent Index and the MACD. This is a good exam-
ple of using oscillators based on price and market breadth as a means to mitigate
the adverse effects of multicollinearity.
geometrically based Oscillator pattern analysis
Buy and sell signals may be derived from applying geometrically based overlay
indicators to window oscillators. Overlays that are usually employed include:
■ (^) Trendlines
■ (^) Channels
fIgure 8.10 Bullish and Bearish Divergences Accurately Forecasting Reversal on the
Daily Chart of GBPUSD.
Source: MetaTrader 4