The SAG Gauge is a multi-pronged technical indicator created by Chris Guthrie in 2016. Chris developed an indicator that combines moving averages of the high and low of stocks and other market quotes to determine the end of overexuberant movement resulting in trend reversal. The gauge also includes a stochastic oscillator to provide the final overbought (SELL) and oversold (BUY) signal.

High Moving Average: 10
Low Moving Average: 10
Stochastic Length: 19
Smooth K Value: 10
Smooth D Value: 10

The overbought indicator is calculated as follows. First the stock's high must be above the high moving average. This is depicted by the ribbon over the main chart in the DJIA chart below. The high moving average is the green line (top of the ribbon). The initial SELL signal will populate after the stock's high achieves a two-day retreat from the highest high while remaining above the moving average as seen in arrows A and B in the chart.

SAG Gauge on DJIA chart from TradingView
Dow Jones Industrial Average Chart from TradingView.com

You may see that arrow B only follows a one day retreat, however, it is signaling because the top was achieved at arrow C. For this occasion, the highs remained above the moving average and was the second lower high from a recent highest high above the moving average. The chart above signals every potential SELL signal solely based on a two-day retreat while above the high moving average with a red "S" on the chart. The SAG gauge is fully depicted underneath the chart, complete with the stochastic oscillator. The potential SELL signal is represented with a yellow "S".

Once the first SELL signal appears, it is applied to the stochastic oscillator which is traditionally used to calculate overbought levels when the K and D values in the stochastic are above the 75 level. The 75 level in the chart above is the top white line. The stochastic is considered overbought and downward moving when the red line (D value) is larger than (above) the green line (K value). This first occurs at the same time a SELL signal appears with arrow A. The SAG Gauge first indicates an opportunity to SELL, because a SELL signal occurs at the same time the D value is greater than the K value while the stochastic is overbought. This is indicated with arrow D.

We will look at arrow E to further understand how this works. Obviously, arrow E is pointing to a SELL signal, but the position of the stochastic K and D values are important. We will ignore the fact the stochastic is not above the overbought level of 75 and assume it was to drive this point home. If the K and D values were above the 75 level and a SELL signal occurred due to a two-day retreat from a high above the high moving average, this would not produce an overall SELL indication on the SAG Gauge. This is because the stochastic K value is higher than the D value. If the reverse were true regarding the D and K values (while the stochastic was above the 75 level), a SELL indication on the SAG Gauge would occur.

The oversold indicator is like the overbought requirements with the opposite criteria. The oversold indicator is calculated as follows. First the stock's low must be below the low moving average. This is depicted by the ribbon over the main chart in the XLE chart below. The low moving average is the red line (bottom of the ribbon). The initial BUY signal will populate after the stock's low achieves a two-day retreat from the lowest low while beneath the low moving average as seen in arrows A and B in the chart.

SAG Gauge on XLE chart from TradingView
Energy Select Sector SPDR ETF from TradingView.com

You may see that arrow B only follows a one day retreat, however, it is signaling because it is a higher low than two days prior at arrow C. For this occasion, the lows remained beneath the moving average and was a higher low from a recent lowest low beneath the moving average. The chart above signals every potential BUY signal solely based on a two-day increase while beneath the low moving average with a green "B" on the chart. The SAG gauge is fully depicted underneath the chart again, complete with the stochastic oscillator. The potential BUY signal is represented with a white "B".

Once the first BUY signal appears, it is applied to the stochastic oscillator which is traditionally used to calculate oversold levels when the K and D values in the stochastic are below the 25 level. The 25 level in the chart above is the bottom white line. The stochastic is considered oversold and upward moving when the red line (D value) is smaller than (below) the green line (K value). This first occurs at the same time a BUY signal appears with arrow D. The SAG Gauge first indicates an opportunity to BUY, because a BUY signal occurs at the same time the D value is less than the K value while the stochastic is oversold. This is indicated with arrow E.

We will look at arrow F to further understand how this works. Obviously, arrow F is pointing to a BUY signal, but the position of the stochastic K and D values are important. We will ignore the fact the stochastic is not below the oversold level of 25 and assume it was to drive this point home. If the K and D values were below the 25 level and a BUY signal occurred due to a two-day retreat from a low below the low moving average, this would not produce an overall BUY indication on the SAG Gauge. This is because the stochastic D value is higher than the K value. If the reverse were true regarding the D and K values (while the stochastic was below the 25 level), a BUY indication on the SAG Gauge would occur.

The baseline values mentioned above produce great BUY and SELL signals, but all traded quotes vary. Feel free to plug in different values and let us know what works best for you. Below are accuracy levels when applied to some indices, stocks, and funds using our baseline values.
The tables below depict the accuracy of SAG Gauge indications. All figures indicate how many times the tracked quote moves the respective amount after the signal date. All figures encompass the maximum moves over the next 35 trading days after the signal date. If the signal happens on a Monday, the first day for movement begins on Tuesday. The first table covers the Dow Jones Industrial Average which has signaled overbought 154 times and oversold 18 times since 1985. The Dow drops at least 0.50% ninety percent of the time overbought is signaled. Additionally, it gains at least 0.25% every time oversold is signaled. Likewise, it gains at least 1.75% ninety percent of the time oversold is signaled.

Dow Jones Industrial Average

Data goes back to 1985

SIGNAL OCCURENCES 100% 90% 80% 70% 60% 50% 40%
OVERBOUGHT 154 - 0.50% 0.75% 1.00% 1.50% 2.25% 2.75%
OVERSOLD 18 0.25% 1.75% 2.00% 3.25% 4.50% 5.25% 5.75%

Standard & Poor's 500

Data goes back to 1950

SIGNAL OCCURENCES 100% 90% 80% 70% 60% 50% 40%
OVERBOUGHT 247 - 0.25% 0.50% 1.00% 1.50% 2.25% 2.75%
OVERSOLD 18 0.25% 1.50% 1.75% 2.25% 3.25% 4.75% 6.25%

NASDAQ Composite

Data goes back to 1971

SIGNAL OCCURENCES 100% 90% 80% 70% 60% 50% 40%
OVERBOUGHT 211 - 0.08% 0.50% 1.00% 1.50% 2.25% 3.00%
OVERSOLD 53 - 0.25% 1.25% 2.75% 4.25% 6.75% 7.75%

New York Stock Exchange

Data goes back to 1965

SIGNAL OCCURENCES 100% 90% 80% 70% 60% 50% 40%
OVERBOUGHT 214 - - 0.50% 0.75% 1.25% 1.75% 2.25%
OVERSOLD 14 - 0.25% 0.50% 1.00% 3.25% 4.25% 5.50%

Russell 2000 Index

Data goes back to 1987

SIGNAL OCCURENCES 100% 90% 80% 70% 60% 50% 40%
OVERBOUGHT 143 - 0.08% 0.75% 1.25% 1.75% 2.25% 2.75%
OVERSOLD 23 0.50% 1.00% 2.50% 4.00% 4.50% 6.00% 6.75%

©2017 LIMITLESS LIFE SKILLS LLC
Powered by

Leave a Reply

Your email address will not be published. Required fields are marked *