Elder Ray Index

Elder Ray plots two separate histograms derived from the relationship between daily price extremes and the 13-period exponential moving average (EMA). Bull Power equals the daily high minus the 13-EMA. Bear Power equals the daily low minus the 13-EMA.

Bull Power is always positive when buyers push price above consensus (the EMA) and approaches zero when the daily high barely exceeds the EMA. A rising Bull Power histogram confirms buyers are gaining strength. Falling Bull Power, even if price is still rising, warns that buying pressure is diminishing — a form of divergence.

Bear Power is always negative when sellers push price below the EMA. A Bear Power value closer to zero (less negative) means sellers are weaker. Rising Bear Power (becoming more negative) means selling pressure is increasing. When Bear Power makes a new low while price does not, a bearish divergence warns of potential downside ahead.

The 13-period EMA represents the market's consensus value — the price level where buyers and sellers agree on fair value. Bull Power and Bear Power measure how far each side pushes price away from that consensus, making them intuitive measures of relative supply and demand strength.

Dr. Alexander Elder designed the Elder Ray Index as the second screen of his Triple Screen Trading System — a multi-timeframe framework that combines trend identification, oscillator signals, and entry precision.

Screen 1 (Weekly trend): Use a weekly trend-following indicator (MACD or the direction of the weekly EMA) to determine whether you are in a bull or bear market. Only take trades in the direction of the weekly trend.

Screen 2 (Daily oscillator): On the daily chart, use an oscillator — Elder Ray, Stochastic, or Force Index — to find counter-trend dips within the weekly trend. In a weekly uptrend, buy when the daily Bear Power is negative but rising (sellers weakening). In a weekly downtrend, sell when daily Bull Power is positive but falling (buyers weakening). This is the Elder Ray signal.

Screen 3 (Intraday entry): Once Screens 1 and 2 align, use an intraday chart for the entry. In an uptrend with a bullish Elder Ray signal, buy when price ticks up after a pullback — a two-bar trailing stop below the previous two bars' lows.

The Triple Screen methodology prevents trading against the dominant trend (a common mistake) while using oscillators to time entries at better prices within the trend. Tradewink's momentum signal composite incorporates Elder Ray signals in the context of broader trend filters.

Elder Ray generates its most reliable signals through divergences — when the indicator fails to confirm what price is doing. The four key divergence setups are:

Bullish divergence (Bear Power): Price makes a new low but Bear Power makes a higher low (less negative). Bears are losing strength even as price reaches new lows — a classic accumulation signal. Best in context of a rising weekly EMA.

Bearish divergence (Bull Power): Price makes a new high but Bull Power makes a lower high. Bulls are losing momentum even at new price highs — a distribution warning. Best in context of a declining weekly EMA.

Directional signals without divergence: In a strong trend, Elder Ray generates continuation signals. In an uptrend: buy when Bear Power turns from negative to zero (sellers exhausted). In a downtrend: sell when Bull Power turns from positive to zero (buyers exhausted).

False signals occur most often during extreme market conditions — highly volatile earnings days or macro shock events where the 13-EMA cannot adapt quickly enough to provide a reliable consensus baseline. Tradewink's signal engine weights Elder Ray signals lower during high-volatility regimes detected by the market regime detector.

Elder Ray occupies a distinct conceptual space among momentum indicators. RSI and Stochastic measure price relative to a recent price range — they are normalized, producing overbought/oversold readings between defined bounds. MACD measures the difference between two EMAs, capturing momentum in the trend itself. Elder Ray measures how far the daily extremes (high and low) deviate from the consensus EMA — it directly quantifies the power of buyers and sellers rather than synthesizing a derived momentum signal.

This distinction gives Elder Ray a practical advantage: it decomposes market activity into two separate components (buying power and selling power) rather than combining them into a single number. A stock can have high Bull Power AND high Bear Power simultaneously — indicating both bulls and bears are active, typically during a volatile, indecisive market. A stock with high Bull Power and Bear Power approaching zero is a strongly trending market with sellers absent.

The main limitation of Elder Ray relative to RSI or MACD is that it is not normalized, making cross-security comparison difficult. A stock trading at $500 will have larger absolute Bull/Bear Power values than a $20 stock for the same percentage move. Normalizing by dividing by the EMA value converts Elder Ray to a percentage-based measure, enabling comparison across securities — the approach Tradewink uses internally.