Expansion Contraction IndicatorExpansion Contraction measures the speed at which price moves through two moving averages, a 10 period SMA of the high and an 8 period SMA of the low (Moving Average Channel). When the Positive Short line crosses above the zero line and the cloud is green, we are in a strong uptrend and a buy signal can be taken. When the Negative Short line crosses above the zero line and the cloud is red, we are in a strong downtrend and a sell signal can be taken.
Standard deviation lines are added to measure the strength of the trend and support and resistance areas. When the short lines go above 1 or 2 standard deviations, it may indicate price may have gotten very high or very low too quickly in the short term. When the cloud goes above 2 standard deviations, it may indicate the overall trend may be getting ready for a reversal.
Formula created by Brian Latta, author of The Book on Trading - The Secret Language of the Markets . Moving Average Channel concept by Jake Bernstein, author of many best-seller books on day-trading, including The Compleat Day Trader , Seasonal Futures Spreads , and more.
