S&P Price Oscillator Is Three Standard Deviations From Mean: 99% Outlier Market

Zero Hedge

Sentiment Trader’s Price Oscillator reading just went off the charts. Earlier, it hit a value of 72%, an 18% increase, and a number which falls between two and three standard deviations from the mean: a 1% outcome assuming a normal distribution.

As a reminder the price oscillator is a very common, reliable technical tool used to measure trend and probabilities of reversals. Most, if not all quant systems, use some sort of variation, mostly more sophisticated and timely, but based on the same idea. In essence, the indicator demonstrates that if the market move is too fast, it is not sustainable, unless, of course, Central Banks and the G20 promise to never stop printing money. Ever.

For those who want a recap of the technical implications from an extreme price oscillator reading, here is a summary from Sentiment Trader:

When the Price Oscillator reaches an extreme, it often marks short-term exhaustion in buying or selling pressure. We generally use readings over 59% to indicate an excessive amount of buying pressure (particularly when in a longer-term downtrend), and readings below 41% to indicate that the selling may be overdone (especially when in a longer-term uptrend). This indicator works especially well within defined trading ranges, and will give a false signal (likely becoming very extreme) when a trading range is broken and a new trend begins.

Statistical overview:

• 68% of readings (1 standard deviation) should be between 41% and 59%
• 95% of readings (2 standard deviations) should be between 32% and 68%
• 99% of readings (3 standard deviations) should be between 23% and 77%

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