The Klinger Oscillator was developed by Stephen Klinger to determine the long-term trend of money flow while remaining sensitive enough to detect short-term fluctuations. The indicator compares the volume flowing through a security with the security's price movements and then converts the result into an oscillator that can be easily interpreted by market technicians.
The Klinger Oscillator is fairly complex to calculate, but it's based on the idea of force volume, which is accounts for volume, trend (positive or negative), and temp (a complex formula with multiple inputs). Using this data, the oscillator is created by looking at the difference between two exponential moving averages of force volume involving different time frames. The idea is to show how the volume flowing through a security is impacting its long-term and short-term price direction.
A signal line (13-period moving average) is used to trigger buy or sell signals. This technique is very similar to signals that are created with other indicators such as the moving average convergence divergence. While these are the base signals generated by these indicators, it's important to note that these techniques may generate a lot of trading signals that may not be as effective in sideways markets.
The Klinger Oscillator also uses divergence to identify when price and volume are not confirming the direction of the move. It's a bullish sign when the value of the indicator is heading upward while the price of the security continues to fall and vice versa for a bearish sign. Often times, these readings can be more accurate than actual crossovers in predicting upcoming reversals.
Traders will use other tools such as trend lines, moving averages and other indicators to confirm the reversal. In addition, traders may use the oscillator in conjunction with chart patterns, such as price channels or triangles, as a way to confirm a breakout or breakdown.
The following chart shows an example of the Klinger Oscillator on the SPDR S&P 500 ETF (NYSE ARCA: SPY).
In the above chart, the Klinger Oscillator appears below the price chart and consists of the reading and the signal line (13-period moving average). In late-January, the crossover of the Klinger Oscillator below the signal line would have created a timely sell signal that would have enabled traders to exit near the peak of the rally. The steady upwards trend between March and June could also indicate that the exchange-traded fund would see a move higher over the coming periods.
Chart courtesy of TradingView.com.