Versus MA (Short Term)

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Volume 18 – Versus MA (Short Term)

The larger upper frame shows a price series drawn on a logarithmic scale with a 50 day moving average. The ratio of the price series to the moving average is drawn on a logarithmic scale in the lower, smaller frame. The same smoothing (50 day) is applied to the ratio (heavier line). The horizontal axis is drawn at 1.00 (where price and its moving average coincide).

This chart format provides a unique way of viewing moving averages. The ratio is an oscillator (VSMA). Since it is a ratio, it has been normalized, so it doesn’t matter whether price is 100 or 5000 — a VSMA reading of 0.75 means the same thing (0.75 means price is 75% of its MA). It allows the investor to place current price action in perspective by comparing the current oscillator value with previous extremes. For example, the 1990, 1995 and 1996 highs of the 50 day DJIA VSMA oscillator were all in the same area.

Dow Jones Industrials
Dow Jones Transports
Dow Jones Utilities
NASDAQ Composite
NYSE Composite
Standard & Poor's 500
Gold (in US$)
Silver (in US$)
British Pound (in US$)
German Mark (in US$)
Japanese ¥en (in US$)
Swiss Franc (in US$)

All of the charts in Volume 18 are daily charts that begin in 1990.

V18a, DJIA versus its 50 day MA, March 1997 (4kb)

The upper frame shows the DJIA and its 50 day MA, while the lower frame shows the ratio of the DJIA to its 50 day MA, and the 50 day MA of that ratio.

This is a 4kb GIF thumbnail!
It would take
over sixty full SVGA screens to show the detail on one Topline chart.

The real charts look much better than these thumbnails.

Adobe Acrobat PDF file (73kb)
This file is a 600 dot per inch rendering of the March 1997 V18a chart. The actual charts have the edition and chart number printed in the margin (between the holes for the three ring binder).

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The ratio of price to its moving average has advantages over traditional momentum. With traditional momentum (the ratio of today’s price to the price n periods ago), large price moves create an "echo effect". You know in advance that 200 trading days after the August, 1987 peak, 200 day momentum will rise dramatically as the denominator of momentum drops dramatically. This "echo" has nothing to do with today’s price action. By using a moving average for the denominator, the VSMA oscillator avoids this deceptive behavior. It also tends to smooth the oscillator (as compared to raw momentum), since the denominator is smoothed. It does this without sacrificing sensitivity to current prices, since the numerator is the unsmoothed current price. VSMA reacts to today’s price swings, not those of the past.

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Last modified: April 06, 2005