Name, Sometimes Called:
Detrended Price Oscillator
Sometimes abbreviated DPO
Brief Description:
The Detrended Price Oscillator (DPO), as its name
implies, tries to eliminate the trend in prices. Detrended prices
help to more easily identify short-term cycles and oversold or overbought
levels. The DPO removes the longer-term cycles from prices, thus
making the shorter-term cycles more visible.
Definitions, Formulas:
As its name implies, the Detrended Price Oscillator
tries to eliminate the trend
in prices. In removing the longer-term cycles from prices, the DPO
makes the shorter-term cycles more visible. Detrended prices help
to more easily identify both short-term cycles and oversold or overbought
levels.
To calculate the Detrended Price Oscillator, first decide on the
time frame that you wish to analyze. We use 20 days.
Then set n as half of the cycle period (10 days).
Next, calculate a simple moving average SMA for n days:
SMA(10)(price) = 
where
Ci is the closing price on day i
Calculate p = (n / 2) + 1 = 6
Finally, subtract the moving average, from p days ago, from the
closing price:
DPO = CTODAY - SMA(10)(price) from
6 days ago.
This calculation effectively moves the DPO back 6 days to eliminate
the trend in prices.
Positive Development Calculation:
For this TAI, a new positive development (NPD) occurs
when DPO crosses above zero; that is, when DPO x+ 0.
This TAI is no longer positive when DPO crosses below zero; that
is, when DPO x- 0.
If this TAI is still positive tomorrow, it will no longer be new,
but will be a cumulative positive development (CPD).
If this TAI was a new positive development (NPD)
yesterday, and is still positive today, then it becomes a cumulative
positive development (CPD).
History:
It is often useful to be able to identify major turning
points in a long-term cycle. Such turning points will be apparent
if the short-term cycles within the longer-term cycle are made visible.
By removing the longer-term cycle from prices, the DPO exposes the
short-term cycles and possible oversold or overbought levels.
This chart is an example of the DPO indicator in action. When DPO
crossed over zero on 12/24/1999 that is a new
positive development (NPD) and predicts a price rise in the
short term. Remember the DPO is computed after the close. In the
case of GERN the next few days were generally down, followed by
some modest increase and a large increase. DPO is considered a cumulative
positive development (CPD) until it crosses back under zero.
For GERN that was 1/17/2000.
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