The Awesome Oscillator (AO) is a momentum indicator that can help you identify turning points (reversals) in the market. Like the MACD and RSI, the AO also shows you the strength of market movements as it oscillates above and below its zero line.
How you can make the most out of this indicator is what this article is about.
How to read the Awesome Oscillator (AO)
The awesome oscillator calculates the difference between the 34-period and 5-period simple moving averages. The result is a histogram of red and green bars that fluctuate depending on if the price is moving up or down.
The simplest signals generated by the awesome oscillator are zero line crosses that come in either bearish or bullish varieties. A bullish cross occurs when the indicator crosse above the zero line, while a bearish cross occurs when the indicator crosses below the zero line.
It should be noted that while the AO is able to measure the change and magnitude of momentum, it cannot reliably forecast a change in prices (as with other indicators).
Although momentum is a leading indicator, a change in momentum is just that: a change in the speed or velocity of price movements. Therefore, additional evidence should be taken from other indicators before anticipating a change in prices.
There are also other signals generated by the awesome oscillator. One signal relates to peak and trough analysis that can be performed on the histogram of the oscillator, which is named twin peaks.
Twin peaks occur when price makes a high and then a higher high at market bottoms. This is a signal that indicates that a shift in momentum is about to take place which could infer higher prices. You may also see twin peaks form near market tops of successive lows that could infer lower prices moving forward.