Price Oscillators (PPO)

Introduction

The Price Oscillator is an indicator based on the difference between two moving averages, and is expressed as either a percentage or in absolute terms. The number of time periods can vary depending on user preference. For daily data, longer moving averages might be preferred to filter out some of the randomness associated with daily prices. For weekly data, which will have already filtered out some of the randomness, shorter moving averages may be deemed more appropriate. In addition, a moving average of the ensuing plot can be overlaid to act as a trigger line, much like is done with MACD. In our charts and commentary, we will use the abbreviation PPO to refer to the Percentage Price Oscillator and APO to refer to the Absolute Price Oscillator.

Absolute Price Oscillator (APO)

The Absolute Price Oscillator (APO) is calculated by subtracting the longer moving average from the shorter moving average. For example:

10-period exponential moving average (EMA) minus 30-period EMA

The resulting plot forms an oscillator that fluctuates above and below zero according to the differences in the moving averages. If the shorter moving average is above the longer moving average, then the indicator will be positive. If the shorter moving average is below the longer moving average, then the indicator will be negative.

The Moving Average Convergence Divergence (MACD) indicator calculated as the difference between two exponential moving averages and is essentially equivalent to the APO. StockCharts does not provide an indicator called "APO" in our SharpChart tool - you should use the MACD instead. 

Percentage Price Oscillator (PPO)

The Percentage Price Oscillator is found by subtracting the longer moving average from the shorter moving average and then dividing the result by the longer moving average. For example:

(10-period EMA minus 30-period EMA) divided by the 30-period EMA

This formula displays the difference between the two moving averages as a percentage of the longer moving average.

Absolute versus Percentage

The Percentage Price Oscillator (PPO) and the Absolute Price Oscillator (APO) generate many of the same signals and have basically the same shape. All centerline crossovers, which represent the shorter moving average crossing above or below the longer moving average, occur at the same time. However, because the PPO is percentage-based, the shape of its lines can differ in subtle but important ways from the shape of the APO's lines. Below is a chart of the NASDAQ Composite that illustrates some of the differences that may crop up.

1. The green circle shows that the PPO formed a lower high in December while the APOformed a higher high.
2. Later in December, the APO continued higher and the PPO began to flatten out. (red arrows)
3. In early January, the PPO recorded a lower low, which was a day earlier than the APO.

There are two main reasons for using the PPO instead of the APO.

1. 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 price of a security. The Percentage Price Oscillator (PPO) for SLB only reached 3% for its highs while that of the NASDAQ Composite rose above 7%.

1. The Percentage Price Oscillator is a better 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 Absolute Price Oscillator, the higher the price of the stock, the greater the extremes of the oscillator. With the Percentage Price Oscillator, a comparison of Amazon over time is possible regardless of whether the stock is at 10 or 100.

PPO-Histogram

Because the Price Oscillator and MACD are so similar, the concept of the MACD-Histogram has been applied to the PPO. The PPO-Histogram shows the difference between the PPO and the 9-day EMA of the PPO. The plot is presented as a histogram so that centerline crossovers and divergences are easily identifiable. The same principles that apply to the MACD-Histogram are also applicable to the PPO-Histogram.

A centerline crossover for the PPO-Histogram is the same as a moving average crossover for the PPO. If the value of the PPO is larger than the value of its 9-day EMA, then the value on the PPO-Histogram will be positive. Conversely, if the value of the PPO is less than its 9-day EMA, then the value of the PPO-Histogram will be negative.

Further increases or decreases in the gap between the PPO and its 9-day EMA will be reflected in the PPO-Histogram. Sharp increases in the PPO-Histogram indicate that the PPO is rising faster than its 9-day EMA – bullish momentum is strengthening. Sharp declines in the PPO-Histogram indicate that the PPO is falling faster than its moving average – bearish momentum is increasing.

PPO and SharpCharts

SharpCharts allows users to chart the Percentage Price Oscillator by selecting "Price Oscillator (PPO)" from any "Indicators" dropdown. The standard settings of "12,26,9" are automatically added to the "Parameters" box and can be changed to any combination of integer numbers. The first parameter is the number of periods to use for the first EMA in the calculation. The second parameter is the number of periods to use for the second (typically longer) EMA. The last parameter is the number of periods to use for the signal line.