Ratio of Price to a Moving Average
We can also detrend the data by subtracting it from, or dividing it by, the moving average. The resulting data is a portrayal of the fluctuations about the trend as it is represented by the moving average. Figure 3.4 shows the DJIA with a 20-day moving average again. Following the price chart is another chart showing the ratio of the closing price to that 20-day moving average. You can see the oscillations around the trend more clearly in this lower chart. The peaks and valleys in the ratio chart show the periodicity of price oscillations. Sometimes these are regular, as in a harmonic cycle, and sometimes they are irregular and of little predictive use. In this instance, they are regular. The lows, for example, occur roughly every 68 days.
Figure 3.4. Dow Jones Industrial Average, 20-day moving average, and ratio of current price to the 20-day moving average, showing 68-day cycle period of lows (January 4–December 31, 2010)
Created with TradeStation. ©TradeStation Technologies, Inc. All rights reserved.