Some parts of the market are in a bit of turmoil, but US stocks have continued to go for the gold. After the S&P 500 gained more than 1% in January, they are potentially on track for more gains in February. Since 1945, when the S&P 500 rises during both January and February, there is a 100% success rate of a positive full year. And investors that use chart analysis might find the Williams %R indicator, which is nearing a buy signal, may lend support to further bullish sentiment over the short term.
What is Williams %R?
While not as widely used as other indicators such as moving averages, MACD, RSI, stochastics, and other technicals, Williams %R has many similarities to those—especially stochastics. Williams %R measures the price of an investment or index relative to the highest high for a given period of time. Essentially, it compares the last closing price to the highest price during a period of time. In contrast, stochastics compares the last closing price to the lowest price during a period of time.
Williams %R is a momentum oscillator that ranges between 0 and –100. Essentially, readings between 0 and –20 are considered sell signals and those from –80 to –100 are considered buy signals. Additionally, a cross above the –50 level is considered a bullish signal and a cross below –50 is considered a bearish signal. It’s worth noting that oscillators—including Williams %R—can remain in what is considered overbought or oversold ranges for extended periods of time.
The top part of the following chart shows how stocks have been in a long-term uptrend. The bottom part shows what the Williams %R indicator looks like (you can select Williams %R in Active Trader Pro® under the “indicators” dropdown menu).
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Recently, Williams %R trended higher and approached -50. Because it not between 0 and -20 or -80 to -100, this indicator is not currently generating a buy or sell signal using its current reading. However, Williams %R has been trending higher recently, and if it were to cross above the -50 line, that would generate a buy signal.
The bigger picture
Of course, indicators like Williams %R should never be used in isolation to help you make trading decisions. It can be used in combination with other technical and fundamental data points to help form your outlook on an individual stock and on the overall stock market.