Larry Williams developed the Ultimate Oscillator as a way to account for the problems experienced in most oscillators when used over different lengths of time. Williams' Ultimate Oscillator, therefore, combines three oscillators which represent short, intermediate, and long term market cycles (7, 14, & 28-period). It is expressed as a single line plotted on a vertical range valued between 0 and 100.
An oscillator refers to a momentum or rate-of-change indicator that is usually valued from -1 to +1 or 0% to %100.
Williams' suggested interpretations must meet fairly rigorous criteria, but can be very powerful in certain market climates and when verified with other indicators.
A first set of signals is generated when there is a divergence between price action and what is seen on the Ultimate Oscillator.
When the price reaches a lower low and is not supported by a lower low of the Ultimate Oscillator, a bullish signal is generated, provided that the Oscillator falls below thirty during this divergence AND the Oscillator then rises above its high during the span of the divergence.
The subsequent uptrend can be ended, according to Williams' interpretation, should the value of the Ultimate Oscillator rise above seventy OR rise above fifty and then dip below forty-five.
When the price reaches a higher high and is not supported by a higher high of the Ultimate Oscillator, a bearish signal is generated, provided that the Oscillator rises above fifty during this divergence AND the Oscillator then falls below its low during the span of the divergence.
The subsequent downtrend can be ended, according to William's interpretation, should the value of the Ultimate Oscillator rise above sixty-five OR fall below thirty.