Name, Sometimes Called:
Percentage Price Oscillator
Abbreviated PPO
Brief Description:
The Percentage Price Oscillator (PPO) is based on the
difference between two exponential moving averages, expressed as
a percentage. It has the advantage that it allows comparisons across
issues and across time periods for the same issue.
Definitions, Formulas:
The difference between two exponential moving averages
(EMAs),
expressed as a percentage, is the basis for the Percentage Price
Oscillator. The analyst’s preferences will determine the number
of time periods used. Longer moving averages of daily data might
be used to filter out some of the randomness associated with daily
prices. Weekly data will already have some of the randomness filtered
out, so shorter moving averages may be more appropriate. We use
a ten-day EMA and a 30-day EMA.
The Percentage Price Oscillator (PPO) is created by subtracting
the longer moving average from the shorter moving average and then
dividing the result by the longer moving average:
PPO = [ EMA(10)(Price) - EMA(30)(Price) ] / EMA(30)(Price)
Positive Development Calculation:
For this TAI, a new positive development (NPD)
occurs when the PPO crosses above zero, that is, when PPO x+ 0.
This TAI is no longer positive when the PPO crosses below zero,
that is, when PPO 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:
The PPO has these advantages:
- With the Percentage Price Oscillator, it is possible to compare
Price Oscillator levels from one security to the next. A PPO reading
of +5% means that the shorter moving average is 5% higher than
the longer moving average. This percentage reading is comparable
against another security, regardless of the security’s price.
- The Percentage Price Oscillator is a good representation of
the two moving averages relative to each other. The difference
between the two moving averages is shown in relation to the shorter
moving average. This allows for comparisons across time periods,
regardless of the price of the stock. With the Percentage Price
Oscillator, a comparison over time is possible whether a security
is at 10 or 100.
The chart below shows the PPO indicator in use from October 2004
through October 2005 applied to Panera Bread (PNRA). During that
year there were two PPO positive developments, November 2004 and
May 2005. Each NPD had a clearly defined date when it became no
longer a positive development. Not explicitly noted on the chart
was a whipsaw in early May 2005. PPO popped up above zero for the
briefest of periods. Had you made your investment at that point
you would have had a drawdown, but the real PPO x+ 0 came few days
later.
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