Oscillators and the Range Expansion Index

Oscillators are designed to identify overbought and oversold conditions. They are based on price differencing calculations — either subtraction or division or a combination of the two using a trader selected look-back period. The examples of the TD REI used here use a five-bar look back period.

Most oscillators set to a five-bar look back period would be very sensitive, jumping back and forth between low and high levels, or if the market is trending, getting stuck for prolonged periods at high or low readings, depending on the direction of the trend. However, the TD REI is a smoother oscillator than most. DeMark uses three unique calculations to reduce the oscillator’s sensitivity.

As with other oscillators, TD REI is a ratio. The numerator is the sum of the differences between two highs and two lows, which is divided by the absolute value of the differences between the two highs and two lows.

First, the TD REI adds the difference between the current bar’s high and the high two bars ago to the difference between the current bar’s low and the low two bars ago.

TD REI numerator = (H - H2) + (L - L2)

This is the numerator of the ratio. Using a two-bar calculation instead of a one-bar calculation reduces the impact an unusually wide-ranging bar could have on the calculation.

The denominator uses the absolute values of the H-H2 and L-L2 calculations.

TD REI denominator = (ABS((H - H2)) + ABS((L - L2)))

Second, the TD REI requires the current bars price range to intersect, or overlap, the range of the bar five or six bars ago. Finally, the price range two bars ago must overlap with the close seven or eight bars before that. If neither of these two criteria are met, a zero is substituted in the numerator, which effectively prevents the TD REI from signaling high or low readings when the market is in a strong trend.

To calculate the five-day TD REI, the sum of the numerators over five days is divided by the sum of denominators over five days, and the result is multiplied by 100:

TD REI = (SUM((H - H2) + (L - L2), 5)/ SUM((ABS((H - H2)) + ABS((L - L2))),5))*100

In addition, the TD REI does not use a kind of exponentially based smoothing technique, such as an exponential moving average, which could retain the impact of outlier data (extreme price points) in the indicator for extended periods.