Momentum Indicators
Momentum indicators tell you the speed and strength of price movement. They help identify when a trend is accelerating, decelerating, or about to reverse.
RSI (Relative Strength Index)
What it is: Measures the speed and magnitude of recent price changes on a 0-100 scale.
Interpretation
| RSI Value | Condition | Action |
|---|---|---|
| > 70 | Overbought | Consider selling |
| < 30 | Oversold | Consider buying |
| 50-70 | Bullish momentum | Hold long |
| 30-50 | Bearish momentum | Be cautious |
Signals
RSI > 70: OVERBOUGHT
→ Stock may be overvalued, potential pullback
→ Score: +2 bearish
RSI < 30: OVERSOLD
→ Stock may be undervalued, potential bounce
→ Score: +2 bullish
RSI 50-70: Bullish momentum (+0.5 bullish)
RSI 30-50: Bearish momentum (+0.5 bearish)
Divergence (Advanced)
Divergence occurs when price and RSI move in opposite directions:
- Bullish Divergence: Price makes new low, RSI doesn't → Weakness in downtrend
- Bearish Divergence: Price makes new high, RSI doesn't → Weakness in uptrend
Best for: Identifying overbought/oversold conditions
MACD (Moving Average Convergence Divergence)
What it is: Shows the relationship between two EMAs (typically 12 and 26 period).
Components
| Component | Calculation | Purpose |
|---|---|---|
| MACD Line | EMA 12 - EMA 26 | Main signal |
| Signal Line | EMA 9 of MACD | Trigger line |
| Histogram | MACD - Signal | Visual momentum |
Signals
BULLISH CROSSOVER: MACD crosses ABOVE Signal
→ Momentum shifting upward
→ Score: +1 bullish
BEARISH CROSSOVER: MACD crosses BELOW Signal
→ Momentum shifting downward
→ Score: +1 bearish
ZERO LINE CROSS:
→ MACD above zero: Bullish confirmation
→ MACD below zero: Bearish confirmation
Reading the Histogram
- Growing histogram = Momentum increasing
- Shrinking histogram = Momentum decreasing
- Histogram flip = Potential trend change
Best for: Identifying momentum shifts and trend changes
Stochastic Oscillator
What it is: Compares closing price to the price range over a period (typically 14 days).
Components
- %K: Fast stochastic (more sensitive)
- %D: Slow stochastic (smoothed %K)
Signals
%K > 80: OVERBOUGHT
→ Stock extended, may pull back
→ Score: +1.5 bearish
%K < 20: OVERSOLD
→ Stock depressed, may bounce
→ Score: +1.5 bullish
BULLISH CROSSOVER: %K crosses ABOVE %D
→ Fresh buy signal
→ Score: +2 bullish
BEARISH CROSSOVER: %K crosses BELOW %D
→ Fresh sell signal
→ Score: +2 bearish
Best Setups
| Setup | Description | Score |
|---|---|---|
| Oversold + Bullish Cross | %K < 20 then crosses above %D | +3.5 |
| Overbought + Bearish Cross | %K > 80 then crosses below %D | +3.5 |
Best for: Timing entries and exits in ranging markets
CCI (Commodity Channel Index)
What it is: Measures current price relative to average price over a period, identifying extremes.
Interpretation
| CCI Value | Condition | Meaning |
|---|---|---|
| > 200 | Extreme overbought | High probability reversal |
| > 100 | Overbought | Extended |
| 0 to 100 | Bullish | Positive momentum |
| -100 to 0 | Bearish | Negative momentum |
| < -100 | Oversold | Depressed |
| < -200 | Extreme oversold | High probability bounce |
Signals
CCI > 200: EXTREME OVERBOUGHT
→ High probability reversal
→ Score: +2 bearish
CCI < -200: EXTREME OVERSOLD
→ High probability bounce
→ Score: +2 bullish
ZERO LINE CROSS UP: Bullish momentum (+1 bullish)
ZERO LINE CROSS DOWN: Bearish momentum (+1 bearish)
Why CCI is Unique
Unlike RSI which is bounded (0-100), CCI has no upper or lower limit. This makes extreme readings (±200) particularly significant.
Best for: Identifying extreme momentum conditions and potential reversals
Williams %R
What it is: A momentum oscillator similar to Stochastic, ranging from -100 to 0.
Scale
-100 ←——————————————————→ 0
Oversold Overbought
Interpretation
| Williams %R | Condition |
|---|---|
| > -20 | Overbought |
| -20 to -80 | Neutral |
| < -80 | Oversold |
Signals
Williams %R > -20: OVERBOUGHT
→ Stock extended, may pull back
→ Score: +0.5 bearish
Williams %R < -80: OVERSOLD
→ Stock depressed, may bounce
→ Score: +0.5 bullish
BULLISH CROSSOVER: Exiting oversold (crossing above -80)
→ Score: +1.5 bullish
BEARISH CROSSOVER: Exiting overbought (crossing below -20)
→ Score: +1.5 bearish
Williams %R vs Stochastic
| Feature | Williams %R | Stochastic |
|---|---|---|
| Scale | -100 to 0 | 0 to 100 |
| Speed | Faster | Slower (smoothed) |
| Best for | Quick signals | Confirmation |
Best for: Fast overbought/oversold signals, confirming other momentum indicators
Summary Table
| Indicator | Signal Type | Bullish Score | Bearish Score |
|---|---|---|---|
| RSI Oversold | Extreme | +2 | - |
| RSI Overbought | Extreme | - | +2 |
| MACD Bullish | Crossover | +1 | - |
| MACD Bearish | Crossover | - | +1 |
| Stochastic Oversold | Extreme | +1.5 | - |
| Stochastic Overbought | Extreme | - | +1.5 |
| Stochastic Bullish Cross | Crossover | +2 | - |
| Stochastic Bearish Cross | Crossover | - | +2 |
| CCI Extreme Oversold | Extreme | +2 | - |
| CCI Extreme Overbought | Extreme | - | +2 |
| Williams %R Bullish Cross | Crossover | +1.5 | - |
| Williams %R Bearish Cross | Crossover | - | +1.5 |
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