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The Expansion Contraction indicator, created by Brian Latta, provides enormous insight into a security's market status. Based on Jake Bernstein's Moving Average Channel method, it identifies:
- Long-term trend and trend strength
- Short-term swing and swing strength
- Range expansion and contraction
- Support and resistance levels
- Overbought/oversold conditions
- Divergences
- Short-term breakouts
Watch a video demo of JBXC Complete
Expansion Contraction compares two price points (the high and the low), up or down, through the MAC settings. Since Expansion Contraction measures every period (chart setting), it's technically considered "concurrent" (not a lagging indicator). A second
high and low comparison uses a longer lookback moving average channel.
Long-Term Trends
The shaded part of the Expansion Contraction indicator is the cloud. It represents the instrument's long-term trend. A green cloud indicates an upward trend, whereas a red cloud denotes a downward trend. The clouds
expand as their trends grow stronger and contract as the trends weaken. If the cloud is less than one standard deviation, then there is no effective trend. The instrument is in a period of consolidation.
Short-Term Swings
The Expansion Contraction indicator's thick red and green lines measure the strength of short-term trends (swings). The green line represents the upswing, while the red line is the downswing. Whichever line is
higher determines the current swing. Similar to the cloud, if the top line increases, the swing grows stronger. A decreasing top line is a weakening swing. If both lines are within one standard deviation, the short-term trend consolidates.
Range
The Expansion Contraction indicator measures the range by the height of the cloud. If one trend is taller than the previous trend, the range is expanding, indicating that the current trend is stronger than the preceding
one. Conversely, if the current trend is shorter, the range is contracting, and the trend is (currently) weaker. Please note that a trend may require time to exceed the range of the previous trend. That means a trend may show as weaker
until it grows to exceed the prior trend.
Overbought and Oversold
JBXC calls the events Overbought or Oversold conditions, but Brian Latta prefers to say they are points of limited upside or downside potential. He defines these as events where the Expansion Contraction
indicator moves beyond two standard deviations. JBXC Complete does not label those events on your chart but does note them in the expert commentary.
Divergence
The Expansion Contraction indicator can detect short-term and long-term divergences. Short-term divergences occur between the swings and the prices. Long-term divergences are between the cloud and the prices. A bearish
divergence happens when the prices make a new high, but the green cloud (or upswing) fails to make a similar new high. A bullish divergence occurs when the prices make a new low, but the red cloud (or downswing) does not make a new
high.
Short-Term Breakouts
Short-term breakouts occur when the top line of the Expansion Contraction indicator falls and then turns up. The first bar (and only the first bar) is the breakout.
