# Opinion Oscillator

By Muranaka, Ken | Modern Trader, June 2000 | Go to article overview

# Opinion Oscillator

How can you forecast a market turn? Try taking the participants' psychological temperature.

Sentiment indicators are a measure of the emotions and expectations of investors. In Japan, technical analysts use the psychological index (psychological line or PI), a stochastic oscillator, to predict market direction. It's a simple measure to compute. Yet, if viewed as a statistical model, the PI can be a powerful tool to analyze swings in speculative markets.

The P1 formula is simply:

(X/12] * 100 = PI%

where x is the number of days that the market closed higher compared to the previous day in the past 12 consecutive observations. The PI always ranges between 0% and 100%. The PI usually is plotted like the stochastic oscillator and the relative strength index (RSI). If the PI at or above 75%, the market is considered overbought, generating a sell signal. A PI reading at or below 25%, depicts an oversold market and generates a buy signal.

The PI is not a primary analytical method used by Japanese traders, but rather is one more tool that a trader can add to his current approach. Used in conjunction with other oscillators such as the RSI and moving averages, the PI can capture short-term moves that may not be detected by moving averages and thus can improve the overall predictive power of the trader's analysis.

PI as a statistical model The PI as a random variable will follow a binomial distribution. The 75% line means that the market closed higher nine out of 12 times, whereas the 25% line means that the market closed higher only three out of 12 times.

It is easy to compute the PI values with a spreadsheet such as Excel. Here, the Excel's IF function is used to assign a value of 1 if the closing price is higher than that of the previous day. Otherwise, a value of 0 is assigned. Next, the sum of the 12 consecutive observations is divided by 12. The PI can be expressed by the binomial distribution:

([n above x])[P.sup.x][(1 - P).sup.n-x] for x=0 1, 2,[ldots], or, n,

where n = 12. The PI is defined by the probability of "X ups in n observations."

If p = 0.5, then the market goes up or goes down by the same chance. For the PI with n = 12 and p = 0.5, the index reaches 75% or above with the probability of 7.3%, which is the sum of the probabilities for x = 9, x = 10, x = 11 and x = 12. The index falls to 25% or below with this same probability, which is the sum of the probabilities for x = 3, x 2, x = 1 and x = 0. These probabilities can be computed directly from the binomial formula or a table found in any statistical textbook.

Can the 25% and 75% psychological lines really determine a turning point in the market? Because the PI is associated more often with stock markets than with commodities, we chose the Nikkei 225's data to test the predictive power of this indicator along with the short-term five- and 12-day moving averages.

Testing the model Swings in the cash values of the Nikkei 225 were modeled by the PI as a binomial random variable. Two cases were considered -- bull and bear markets. The prices were obtained from the newspaper Nihon Keizai Shimbun. For a bear market, 201 PIs were computed using the closing prices between Aug. 26, 1997, and June 23, 1998. All the calculations were done with Excel 97.

"Probabilities" (above) is the observed probability distribution showing a fairly good fit with the theoretical binomial distribution having the parameters p = 0.5 and n = 12, but the observed probability distribution is slightly skewed. By trial and error, the value of the probability p to minimize the sum of squares [(observed - theoretical).sup.2] was found to be about 0.48, suggesting that the Nikkei 225 index may not appreciate or depreciate with equal probability, and that the market is more likely to decline by 2% as compared to the previous day. However, the theoretical probabilities for the PI [leq] 25% and PI [geq] 75% are 6. …

If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Highlights (0)
Some of your highlights are legacy items.
Citations (0)
Some of your citations are legacy items.
Notes (0)
Bookmarks (0)

Project items include:
• Saved book/article
• Highlights
• Quotes/citations
• Notes
• Bookmarks
Notes

#### Cited article

Style
Citations are available only to our active members.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

#### Cited article

Opinion Oscillator
Settings

#### Settings

Typeface
Text size Reset View mode
Search within

Look up

#### Look up a word

• Dictionary
• Thesaurus
Please submit a word or phrase above.

Why can't I print more than one page at a time?

Help
Full screen

### How to highlight and cite specific passages

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

## Cited passage

Style
Citations are available only to our active members.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

## New feature

It is estimated that 1 in 10 people have dyslexia, and in an effort to make Questia easier to use for those people, we have added a new choice of font to the Reader. That font is called OpenDyslexic, and has been designed to help with some of the symptoms of dyslexia. For more information on this font, please visit OpenDyslexic.org.

To use OpenDyslexic, choose it from the Typeface list in Font settings.

## Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.