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Aroon
Developed by Tushar Chande in 1995, Aroon is an indicator system that determines
whether a stock is trending or not and how strong the trend is. "Aroon"
means "Dawn's Early Light" in Sanskrit. Chande chose this name because
the indicators are designed to reveal the beginning of a new trend.
Aroon is unique because it focuses on time relative to price. Chartists
can use the Aroon indicators to spot emerging trends, identify consolidations,
define correction periods and anticipate reversals.
Calculation
The Aroon indicators are shown in percentage terms and fluctuate between
0 and 100. Aroon-Up is based on price highs, while Aroon-Down is based on price
lows. These two indicators are plotted side-by-side for easy comparison.
The Aroon indicators fluctuate above/below a centerline (50) and are bound
between 0 and 100. These three levels are important to interpretation. At its
most basic, the bulls have the edge when Aroon-Up is above 50 and Aroon-Down
is below 50. This indicates a greater propensity for new highs than lows. The
converse is true for a downtrend. The bears have the edge when Aroon-Up is below
50 and Aroon-Down is above 50.
A surge to 100 indicates that a trend may be emerging. This can be confirmed
with a decline in the other Aroon indicator. For example, a move to 100 in Aroon-Up
combined with a decline below 30 in Aroon-Down shows upside strength. Consistently
high readings mean prices are regularly hitting new highs or new lows for the
specified period. Prices are moving consistently higher when Aroon-Up remains
in the 70-100 range for an extended period. Conversely, consistently low readings
indicate that prices are seldom hitting new highs or lows. Prices are not moving
lower when Aroon-Down remains in the 0-30 range for an extended period. This
does not mean prices are moving higher though. For that we need to check Aroon-Up.
"Up"
aroon is shown in green, while "down" aroon is shown in red. Notice
that each time up-aroon moves above 50, the sock usually follows suit and moves
higher. The reverse is true when up-aroon falls below 50 and down-aroon rises
above 50.
New Trend Emerging
There are three stages to an emerging trend signal. First, the Aroon lines
will cross. Second, the Aroon lines will cross above/below 50. Third, one of
the Aroon lines will reach 100. For example, the first stage of an uptrend signal
is when Aroon-Up moves above Aroon-Down. This shows new highs becoming more
recent than new lows. Keep in mind that Aroon measures the time elapsed, not
the price. The second stage is when Aroon-Up moves above 50 and Aroon-Down moves
below 50. The third stage is when Aroon-Up reaches 100 and Aroon-Down remains
at relatively low levels. The first and second stages do not always occur in
that order. Sometimes Aroon-Up will break above 50 and then above Aroon-Down.
Reverse engineering the uptrend stages will give you the emerging downtrend
signal. Aroon-Down breaks above Aroon-Up, breaks above 50 and reaches 100.
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