Developed by Larry Williams, the Ultimate Oscillator combines a stock's price action during three different time frames into one bounded oscillator. The three time frames represent short, intermediate, and long term market cycles (7, 14, & 28-period). Note that these time periods all overlap, the 28-period time frame includes both the 14-period time frame and the 7-period time frame. This means that the action of the shortest time frame is included in the calculation three times and has a magnified impact on the results.
It is expressed as a single line plotted on a vertical range valued between 0 and 100, with oversold territory below 30 and overbought territory above 70.
Trading should take place when there is a divergence between price and the Ultimate Oscillator. When the price reaches a new low and is not supported by a new low of the Ultimate Oscillator, a bullish signal is generated, provided the Oscillator falls below thirty during this divergence and the Oscillator then rises above its high during the divergence. According to Williams the subsequent uptrend can be ended should the value of the Ultimate Oscillator rise above seventy or rise above fifty and then fall below forty-five. When the price reaches a new high and is not supported by a new 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 to a new low during the divergence. The subsequent downtrend can be ended should the value of the Ultimate Oscillator rise above sixty-five or fall below thirty.