The KO was developed by Stephen J. Klinger with two opposite goals in mind:
1. To be sensitive enough to signal short-term tops and bottoms
2. To be accurate enough to reflect the long-term flow of money into and out of a security.
The KO is based on the following trends:
- Price range whether high or low, is a measure of movement and volume is the force behind the movement. The sum of High + Low + Close defines a trend. Accumulation occurs when today’s sum is greater than the previous day’s. Conversely, distribution occurs when today’s sum is less than the previous day’s. When the sums are equal, the existing trend is maintained.
- Volume produces continuous intra-day changes in price reflecting buying and selling pressure. The KO quantifies the difference between the number of shares being accumulated and distributed each day as “volume force”. A strong, rising volume force should accompany an uptrend and then gradually contract over time during the latter stages of the uptrend and the early stages of the following downtrend. This should be followed by a rising volume force reflecting some accumulation before a bottom develops.
- By converting the volume force into an oscillator representing the difference between a 34-period and 55-period exponential moving average with a 13-period trigger, the force of volume into and out of a security can easily be tracked. Comparing this force to price action can help identify divergences at tops and bottoms.
Application in Stock market
The following guidelines are recommended to use the Klinger Oscillator :
- The most reliable signals occur in the direction of the prevailing trend. Strict stop guidelines (i.e., failure to penetrate the zero line or a violation of the trigger line) should remain in force.
- The most important signal occurs when the KO diverges with the underlying price action, especially on new highs or new lows in overbought/oversold territory. For example, when a stock makes a new high or low for a cycle and the KO fails to confirm this, the trend may be losing momentum and nearing completion.
- If the price is in an uptrend (i.e., above an 89-day exponential moving average), buy when the KO drops to unusually low levels below zero, turns up, and crosses its trigger line. If the price is in a downtrend (i.e., below an 89-day exponential moving average), sell when the KO rises to unusually high levels above zero, turns down, and crosses its trigger line.
An Important Trading Tip
Plot a 13-period moving average of the formula as a trigger line for entering buy and sell trades.
