Simply stated, oscillators represent the differential between two moving averages.
The idea here is to get a more sensitive reading on the market, using moving averages. By monitoring the differential between the 50-day exponential moving average (EXP-MA) and the 200-day EXP-MA, a trader can gauge the strength, or lack thereof, in the short-term move, on a relative basis.
An oscillator also provides a tangible signal that is visible for identifying when the shorter-term moving average crosses over the longer-term moving average. This is reflected by the change in the oscillator from a positive reading to a negative reading or vice versa.
You can define some examples within the precious metals arena noted in Figures 18.1 and 18.2. In Figure 18.1, from the end of 2003 through the first quarter of 2004, spot gold is in candlestick form, with my preferred oscillator. This midterm indicator simply measures the 50-day EXP-MA against the 100-day EXP-MA. The divergence is obvious, as the oscillator was into a well-defined downtrend following the first peak set in January 2004 and did not even come close to challenging the highs when gold rallied back above $425 in the spring of 2004.
On the contrary, the oscillator could barely generate a positive reading, with prices at a new high, a technically weak circumstance defined by a lack of near-term momentum. In this case, the oscillator’s bearish divergence turned out to be a valuable sign of internal technical weakness, ...

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