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Definition: Elder-Ray Index
Elder Ray index is an index which measures the bull and bear strength in the market, that highlights the amount of selling and purchasing in the stock market. The bull and bear power are known as the two oscillators which measure the buying and selling tendency respectively in the market. An Oscillator is an analytical tool that has two extreme values. It is generally used when there is no clear trend in a company’s stock.
The Elder Ray Index combines the two oscillators with a 13 day exponential moving average. A Moving average filters out different price fluctuations by taking into account the past prices. The exponential moving average gives more weightage to the recent prices. The exponential moving average reacts faster to the recent price changes.
The Bull power is calculated by subtracting the 13-day exponential moving average (EMA) of the closing prices from one of the highest prices of the security. The Bear power is calculated by subtracting the EMA from the lowest price of that trading day. For calculating and interpreting Elder-Ray Index, both Bull Power and Bear Power are plotted under the bar chart of the chosen security as histograms.
For interpreting the graph, the slope is taken into account. An increasing slope implies that the market is becoming more bullish which means that the crowd expects that the price of the securities to rise in future. When there is a decreasing slope, it implies that there is bearish tendency in the market which means the tendency of the securities is expected to fall. The exponential moving average is also known as average consensus of value(price). By measuring the bar’s height to the EMA, the bull power represents the capacity to push the prices above the average consensus of value by the bulls and the bear power represents the capacity to push the prices below the average.