The Ultimate Oscillator combines short-term, intermediate-term, and long-term price action into one oscillator that gives overbought and oversold readings, buy and sell signals, and confirms price action as well as divergences that warn of future price reversals. The creator of the Ultimate Oscillator, Larry Williams, describes the need for different time periods:
- Short-term: The short-term oscillator peaks earlier than price action peaks.
- Long-term: The long-term oscillator is late in responding to price action reversals.
By combining three separate time periods, short-term (usually 7-period), intermediate-term (usually 14-period), and long-term (usually 28-period), the Ultimate Oscillator tends to peak when price peaks. Note that the intermediate and long-term include the short-term time period; hence, the short-term period is weighted more heavily in the Ultimate Oscillator equation.
The Ultimate Oscillator is mainly used to identify divergences and give buy or sell signals based on those divergences. The chart of the E-mini Russell 2000 Futures contract shows an example of a bullish divergence and subsequent buy signal:
Ultimate Oscillator Buy Signal
The Russell 2000 E-mini made a lower low from Low #1 to Low #2. To the contrary, the Ultimate Oscillator made a higher low from Low #1 to Low #2. This bearish divergence is the first step of the buy signal. The second step occurs by drawing a line where the highest high occured during the bearish divergence. Once the Ultimate Oscillator closes above the previous high, then the buy signal is generated.
Interpreting bearish divergences and sell signals is given on the next page.
Next Page - Ultimate Oscillator Sell Signal
