# Stochastic Momentum Index Stock Indices Technical Analysis and Stochastic Momentum Index Stock Indices Signals

Developed by William Blau.

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

## Construction of Stochastic Momentum Index

This indices technical indicator is calculated by comparing the stock index 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 and then the values drawn to form the SMI.

When the closing stock index price is greater than the average of the range, the SMI will move up.

When the closing stock index 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 Indices Technical Analysis and Generating Stock Indices Signals

## Buy and Sell Stock Indices Signals/ Crossover Signals

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

**Buy and Sell Stock Indices Signals/ Crossover Signals**

## Overbought/Oversold Level Crossovers

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

Buy signal is generated when this oscillator falls below oversold level and then rises above this level and starts to move upwards.

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

## Divergence Stock Indices

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

**Bearish Divergence**