Using the 3-10 Oscillator

Using the 3-10 Oscillator

In last night’s Deep Practice, I was asked to teach a little about using the 3-10 momentum oscillator.  This is a tool I used extensively for many years.  I found it best to use with a 20-bar moving average as a measure of central value and as a surrogate trend line.

Although there are many uses of the 3-10, some, like divergences, are never a part of my playbook.  Why?  Because there are always numerous divergences and the vast majority of them get you into trouble.  I think if you added up all the divergences we see on the 3-10 (or any oscillator) and then created a win-loss ratio to see exactly how good divergences are, you would, like me, never try to trade divergence again.

Using the 3-10 Oscillator: It’s About Momentum

The 3-10 is a momentum indicator, and that’s what it measures best.  After revealing momentum to the upside on the rally from A to B (note the 3-10’s large, steep climb from under the zero line to well above it and the slower, blue line rising nicely above the zero line – new momo).  We look for the 3-10 to pullback to the zero line and for price to pull back to the 20-bar MA.  Entry at C and then again at D.  Pullbacks should show weakness in the selling, which both C & D show.

One thing we discussed in Deep Practice was the characteristic of the 3-10 to sometimes highlight tradable market patterns that aren’t easily seen on the chart.  We see three pushes up to E clearly defined on the 3-10.  We see this occurs going into the resistance created by the overnight high at 2810.50.  We also see weakness in the hourly bars going into the resistance.  Exit longs here.

Price falls to F.  the 3-10 also turns down and the 20 MA flattens out.  We patiently wait to the 3-10 to pull up to the zero line and watch how price reacts.  We see it is choppy up to H and as price contacts the 20 MA, we short.

Note how at D the MA served as support.  Later, at H, we are in a similar price area, but now the MA is acting as resistance.

Conventional tools remain critically important.  Here, the trend line and the A-B-C correction tells us this is a good place to cover at least a portion of our shorts.

Using the 3-10 Oscillator: Another Trade

Even though the market was respecting the trend line and appeared as if it were about to break it, the 3-10 continued to express weakness in its indications.  Another short trade taken at the 20 MA.  This was a little premature as price went a little higher.  Nevertheless, the price action was poor and the 20 MA continued to be resistance, not support.  Target is a test of the mid-point of the hourly vertical acceleration at A where price action on the 5-minute is looking climactic and is calling us to cover, which we do.