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The Swenlin Trading Oscillator (STO) is an overbought/oversold indicator that can assist in identifying shortterm tops and bottoms. There are two versions, one using advances and declines, and one using advancing and declining volume.
HOW TO CALCULATE THE STO
The STO is a 5day simple moving average of a 4day exponential moving average of the daily advances minus declines divided by the total daily advances and declines times 1000. (AD)/(A+D)*1000. (See the article on RatioAdjusted Breadth Oscillators). The following formula shows how to calculate the breadth version of the STO using advances and declines. To calculate the volume version simply substitute advancing and declining volume for advances and declines.
First you must calculate the average value of (AD)/(A+D)*1000 for the last four days before you can begin the exponential weighted calulation.
Next you can begin calculating the exponential average. The following is a key for the symbols in the formula.
pdEMA = Prior Day's Average (Begin with simple MA, thereafter pdEMA is an exponential average.)
(AD)/(A+D)*1000 = Current day's advances minus declines divided by the total advances and declines times 1000.
The formula for the EMA is:
((AD)/(A+D)*1000)*0.5)+pdEMA
All that remains is to calculate a 5day simple moving average of the EMA.
HOW TO USE THE STO
The double smoothing of the shortterm data results in a pretty reliable oscillator that persists in one direction before reaching trading range extremes. It usually tops near short term market tops, and bottoms near shortterm market bottoms.
As with most indicators the primary trend of the market will determine how you will use the indicator. In a bull market, STO tops will not be very reliable. In a bear market STO bottoms will not be very reliable.
Divergences between the STO and the price index will often precede changes in trend. Also, we can compare the breadth and volume versions, looking for divergences. Such inconsistencies are warnings that the price trend is not fully supported by breadth and volume.
