The Detrended Price Oscillator attempts to filter out trend in order to focus on the underlying cycles of price movement. To accomplish this, the moving average (generally 14-period) becomes a straight line and price variation above and below the moving average becomes the Price Oscillator. The Detrended Price Oscillator technical indicator can show overbought or oversold levels and can also create buy and sell signals.
The chart of the S&P 500 E-mini Futures contract visually depicts the Detrended Price Oscillator:
Interpreting the Detrended Price Oscillator
When the Detrended Price Oscillator is above the zero line, it means that price is above its moving average, a bullish sign. Similarly, when the Detrended Price Oscillator is below the zero line, it means that price is below its moving average, a bearish sign. There are two interpretations of buy and sell signals:
Buy Signal
- When Detrended Price Oscillator crosses above zero line.
- When Detrended Price Oscillator is in a confirmed oversold area, as referenced by prior lows of the oscillator, and the Detrended Price Oscillator and price both break the downward resistance trendline.
Sell Signal
- When Detrended Price Oscillator crosses below zero line.
- When Detrended Price Oscillator is in a confirmed overbought area, as referenced by prior highs of the oscillator, and the Detrended Price Oscillator and price both break the upward supporting trendline.
The Detrended Price Oscillator is an effective tool for uncovering hidden cycles of overbought and oversold conditions. For more information on Moving Averages and Moving Average crossover, see: Moving Averages.
