MEDIAN PRICE = (HIGH+LOW)/2
AO = (MEDIAN PRICE, 5)-SMA(MEDIAN PRICE, 34)
When the momentum of the past 5 bars is weak compared to that of the 34 bar period, the AO displays this shift as a red bar. When the recent 5 bar momentum is stronger, the AO displays the shift as a green bar. The AO displays these shifts by a series of red and green bars. Series of red bars indicate declining bias. Series of green bars indicates rising bias.
Related to the AO are Zero Line Cross Over, Twin Peaks Patterns, and Price/Momentum Divergence. When the AO is added to other technical indicators, such as Divergent Bars and , traders are able to assess which way a stock is likely to move. The AO can help see what is coming!
Zero Line Cross Over
When the AO crosses over the zero line, moving from above the zero line to below the zero line, this is a declining bias indicator. A rising bias is indicated when the AO crosses over the zero line, moving from below to above.
The Twin Peaks pattern indicates a declining bias when the AO forms a series of green and red bars where each transition from green to red (a peak) is smaller than the previous peak.
A rising bias is indicated when the AO forms a series of green and red bars where each transition from green to red (a peak) is larger than the previous peak.
Declining Bias - When the AO shows declining momentum and, during the same time period the price of the stock is showing a rising trend (higher highs and higher lows), there is divergence that is forecasting an eventual decline in the price. When momentum weakens, price may still rise for a period however, without momentum the price will snap back because there is not enough buying to maintain the upward price momentum. Imagine a rubber band stretched between the two ends of the “V” formed by the two .
In the chart example above, you can see the strong divergence between rising price and declining momentum. The price ended up snapping back in line with the AO and then continued to move lower.
Rising Bias - When the AO shows rising momentum and, during the same time period the price of the stock is showing a declining trend (lower lows and lower highs), there is divergence that is forecasting an eventual rise in the price of the stock. When momentum strengthens, price may still decline for a period however, eventually increasing momentum will push the price higher.