This indicator was developed by Welles Wilder to decipher the underlying trend in the market. Wilder described it "Somewhere amidst the maze of Open, High, Low and Close prices is a phantom line that is the real market." This is his attempt to show this phantom line.
The index uses a scale from -100 to 100, below 0 for a down trend and above for an uptrend.
How to use it
When the market is trending up the reading on the ASI will be positive and when the market is in a downtrend the ASI reading is negative. If the market is trending sideways the reading will vary between positive or negative. The main use for this indicator when trading is when you are looking to confirm trends but needs to be used in combination with other indicators.
Support and resistance lines can then be drawn onto the chart and indicator panel to confirm breakouts. The indicator does this by putting a greater emphasis on the close price of a candle than the random spikes that can take place during the period.
You would look to go long when the ASI indicator moves higher than its previous peak. If the ASI moves lower than the previous low, you would go short.
This indicator has a duel use, to identify support and resistance levels as well as trend lines and market direction. To also capitalise on breakout and divergences between the indicator and chart.