Stochastic Momentum Index Stock Analysis & Stochastic Momentum Index Trading Signals

Developed by William Blau.

Stochastic Momentum Index, SMI indicator is an adaptation of the classic Stochastic Oscillator technical indicator that smoothes out the stochastic oscillations.

Construction of Stochastic Momentum Index Indicator

This stock indicator is calculated by comparing the stocks price relative to the average of an n number of periods.

Then instead of plotting these values directly, smoothing using an Exponential Moving Average is applied & then the values drawn to form the SMI.

When the closing stocks price is greater than the average of the range, the SMI will move upward.

When the closing stocks price is less than the average of the range, the SMI will move down.

This oscillator ranges between the values of +100 and -100, this indicator is also less prone to whipsaws compared to the stochastic oscillator.

Stock Trading Analysis & Generating Trading Signals

Buy and Sell Stock Signals/ Crossover Signals

The Stochastic Momentum Index can be used to generate buy and sell stocks signals using the method shown below, Buy when the SMI is heading upwards and sell when its heading downwards.

Buy & Sell Stock Signals/ Crossover Signals

Overbought/Oversold Level Stock Trading Crossovers

• Overbought levels above +40
• Oversold levels below -40

Buy signal is generated when this oscillator falls below over-sold level and then rises above this level & starts to move upward.

Sell Stock Signal is generated when this oscillator rises above overbought level and then falls below this level & starts to move downward.

Divergence Stocks Trading

The example illustrated and explained below shows a bearish classic divergence between the stocks price & the SMI. When the Stochastic Momentum Index showed this divergence the stocks price stock trend reversed and started to move in a downward direction.

Bearish Stock Trading Divergence