Range Expansion Index (REI)
DeMark on Day Trading Options, by T.R. DeMark and T.R. Demark, Jr., McGraw Hill, 1999 have described a market-timing oscillator, The DeMark Range Expansion Index.
This oscillator uses an arithmetical method of calculation that makes it free from any problems of exponential oscillators (e.g. MACD). The scale of the TD REI oscillator is from -100 to +100 where an overbought is indicated by the values 45 or higher and oversold by the values -45 and lower.
Tom DeMark says that in order to calculate the Range Expansion Index, you should first sum all respective differences of high of the current day and the one that existed two days before along with the differences of lows, the one of the current day and the one that existed two days earlier. This would give you the value that would be positive or negative referring to the fact if the high and low of the current day are higher or lower than they used to be two days before. There are two more conditions to be fulfilled when the value of the certain day is positive or negative which are important to monitor in order to avoid taking premature buying or selling decisions.
These two conditions are as follows:
- The value of the two days' ago high must be higher or similar to the close price existed seven or eight days ago, or the high of the present day must exceed or be equal to the six-days' ago low;
- The low of the two days before should be lower or at the same level than the close existed seven or eight days ago, or the low of the present day mustn't exceed (but can be equal to) the high of the five or six years earlier.
In case both conditions are met, then the sum of the differences between daily highs and lows is taken to determine the next day value. Next step is summing all positive and negative values within five days. This sum is later divided by the each day's (of the 5-day period) absolute value price movement. The possible values of the numerator are positive or negative figures, or zero due to the fact that the value of each day get summed, whether the denominator can only be positive because deals with the price movement difference. The result is multiplied by 100 resulting into the value at the interval from -100 to +100.