Stochastic Momentum Index
The Stochastic Momentum Index developed by William Blau. This indicator plots the closeness relative to the midpoint of the recent high/low range. It is constructed by comparing the price to the average of the high-low price range over a given period. The result is an oscillator that ranges between +/- 100. This results is an oscillator that ranges between -100 and +100 and can be a bit less erratic than an equal period Stochastic Oscillator.
The oscillator is comprised of two lines, the SMI and the moving average of the SMI. When the close is greater than the midpoint of the range, the SMI will be positive. When the close is less than the midpoint of the range, it will be negative.
It is used as a sentiment, or trend identification indicator, thereby providing a better sense of the overall direction of the market. The interpretation of the SMI is virtually identical to that of the Stochastic Oscillator. The most basic pattern to trade from is to buy when the SMI falls below -40 and then returns above it. Sell when the SMI rises above +40 and then falls back below that level. Another trading signal is buy when the SMI rises above the moving average, and sell when the SMI falls below the moving average.