The Elliott Oscillator is a useful indicator to analyze the cyclical behavior of the markets.
The Elliott Oscillator, designed by trader Tom Joseph, is built as a simple difference between a simple 5-period and a 35-period moving average.
It is an oscillator that integrates very well within the cyclic model of the Elliott Wave.
The Elliot Oscillator confirms the solidity of the directional movements made by the market.
During the development of an upward movement, it signals a marked strengthening of upward pressure.
The Elliot Oscillator, in this case, rises decisively, accompanying the rise in prices.
This is the typical behavior that occurs during Wave 3 of an Up-Trend, with the buyers having control of the market.
During the development of a negative trend, it signals a marked strengthening of bearish or downward pressure.
The oscillator must, therefore, go down decisively, accompanying the fall in prices.
This is the typical behavior that occurs during Wave 3 of a Down-Trend, with sellers in control of the market.
Elliott Oscillator Divergences
The second aim is to identify positive or negative divergences regarding price trends.
There is a positive divergence when, with decreasing minimums (lows) in prices, corresponding minimums of the indicator correspond.
Here, the oscillator will experience a decrease in bearish pressure or an increase in bullish pressure.
This situation often signals the exhaustion of a negative trend. It is the typical behavior we find at the end of a downward Wave 5.
There is a negative divergence when, in correspondence with rising peaks in prices, there are decreasing peaks by the oscillator.
Here, the Elliott Oscillator registers a decrease in the upward pressure or an increase in the downward pressure. This situation often signals the exhaustion of a positive trend.
It is the typical behavior we find at the end of an upward Wave 5.
The third purpose is to report accumulative and/or distribution phases.
It can create an accumulative phase when prices, after a rise of a certain consistency, start a lateral movement.
In this situation the Elliott Oscillator beginnings were to rise, showing a strengthening of bullish pressure.
It is the phase that can precede a bullish turnaround, with the Elliott Oscillator moving above its equilibrium line.
A distribution phase can develop when prices, after having suffered a decline of a certain consistency, move sideways.
In this situation, the Elliott Oscillator beginning to fall and registers a strengthening of bearish pressure.
It is this phase that can precede a bearish turnaround.
The Elliott Oscillator falls under its equilibrium line in confirmation of the beginning of a bearish trend (Wave 1).
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External sources: Wikipedia