1. Technical Analysis - Momentum
Indicators
PUNEET ARORA(75141)
SOUMYA ARORA(75158)
BFIA 2B
4/16/2013 1

2. WHAT IS MOMENTUM??
Momentum generally refers to the rate of change. This can be
thought of as an increase or decrease in pressure.
For instance, a stock may be rising at one dollar per month. The
momentum is non-existent even though this stock is going up
because there is no change in the rate at which it rises. If the
stock is rising one dollar this month and none the next, the
momentum would be dropping. As well, if the stock increased
from one dollar price appreciation to two dollars of appreciation
the next month, momentum would be rising.
So when referring to momentum, we can usually refer to it as a
4/16/2013
rate of change. 2

3. What Does Momentum Tell Us?
While there are many ways to trade momentum
indicators, momentum is a good gauge of how
emotions are swinging in the market place.
If a sudden euphoria hits, the momentum indicator
will reflect this. If panic takes over, the momentum
will also show us how the mood has soured. They
are commonly considered to be leading indicators.
Generally speaking, momentum trading is a shorter
window than trend trading and requires practice to
properly analyse trading signals.
4/16/2013 3

4. True
strength
index
Common
Williams Momentum Stochastic
%R Oscillator
Indicators
Relative
Strength
4/16/2013 Index (RSI) 4

5. True Strength Index
published in 1991 by William Blau
using moving averages of the underlying
momentum of a financial instrument, TSI
indicates both trend direction and overbought /
oversold conditions.
4/16/2013 5

6. FORMULA
• c0 = today's closing price
• m = c0 − c1 = momentum (difference between today's and
yesterday's close)
• EMA(m,n) = exponential moving average of m over n
periods, that is,
r = EMA smoothing period for momentum, typically 25
• s = EMA smoothing period for smoothed momentum, typically
13
4/16/2013 6

7. 4/16/2013 7

8. INTERPRETATION
• While the TSI output is bound between +100 and
−100, most values fall between +25 and −25.
• Blau suggests interpreting these values as
overbought and oversold levels, respectively, at
which point a trader may anticipate a market
turn.
• Trend direction is indicated by the slope of the
TSI; a rising TSI suggests an up-trend in the
market, and a falling TSI suggests a down-trend
4/16/2013 8

9. Relative Strength Index - RSI
• The RSI is presented on a graph above or
below the price chart. The indicator has an
upper line, typically at 70, a lower line at
30, and a dashed mid-line at 50. Wilder
recommended a smoothing period of 14 (see
EMA smoothing, i.e. α = 1/14 or N = 27).
• [edit]
4/16/2013 9

10. FORMULA
4/16/2013 10

11. 4/16/2013 11

12. INTERPRETATION
• the RSI ranges from 0 to 100. An asset is
deemed to be overbought once the RSI
approaches the 70 level, meaning that it may
be getting overvalued and is a good candidate
for a pullback. Likewise, if the RSI approaches
30, it is an indication that the asset may be
getting oversold and therefore likely to
become undervalued.
4/16/2013 12

13. As you can see from the chart, the RSI ranges from 0 to 100. An asset is deemed to be
overbought once the RSI approaches the 70 level, meaning that it may be getting
overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is
an indication that the asset may be getting oversold and therefore likely to become
4/16/2013 13
undervalued.

14. Stochastic osillator
• Developed by George C. Lane in the late
1950s.
• the stochastic oscillator is a momentum
indicator that uses support and resistance
levels.
4/16/2013 14

15. FORMULA
• %K = (Current Close - Lowest Low)/(Highest High -
Lowest Low) * 100
• %D = 3-day SMA of %K
• Lowest Low = lowest low for the look-back period
• Highest High = highest high for the look-back
period
• %K is multiplied by 100 to move the decimal
point two places
4/16/2013 15

16. 4/16/2013 16

17. INTERPRETATION
• The Stochastic Oscillator measures the level of the close relative to the
high-low range over a given period of time. Assume that the highest high
equals 110, the lowest low equals 100 and the close equals 108. The high-
low range is 10, which is the denominator in the %K formula. The close
less the lowest low equals 8, which is the numerator. 8 divided by 10
equals .80 or 80%. Multiply this number by 100 to find %K %K would equal
30 if the close was at 103 (.30 x 100). The Stochastic Oscillator is above 50
when the close is in the upper half of the range and below 50 when the
close is in the lower half. Low readings (below 20) indicate that price is
near its low for the given time period. High readings (above 80) indicate
that price is near its high for the given time period. The IBM example
above shows three 14-day ranges (yellow areas) with the closing price at
the end of the period (red dotted) line. The Stochastic Oscillator equals 91
when the close was at the top of the range. The Stochastic Oscillator
equals 15 when the close was near the bottom of the range. The close
equals 57 when the close was in the middle of the range.
4/16/2013 17

18. 4/16/2013 18

19. Williams %R
• It was developed by a publisher and promoter
of trading materials, Larry Williams.
• Williams %R reflects the level of the close
relative to the highest high for the look-back
period.
• In contrast, the Stochastic Oscillator reflects
the level of the close relative to the lowest
low.
4/16/2013 19

20. FORMULA
4/16/2013 20

21. 4/16/2013 21

22. INTERPRETATION
4/16/2013 22

23. • Williams used a 10 trading day period and considered
values below -80 as oversold and above -20 as
overbought. But they were not to be traded
directly, instead his rule to buy an oversold was
– %R reaches -100%.
– Five trading days pass since -100% was last reached
– %R rises above -95% or -85%.
• Or conversely to sell an overbought condition
– %R reaches 0%.
– Five trading days pass since 0% was last reached
– %R falls below -5% or -15%.
4/16/2013 23

24. THANK YOU
4/16/2013 24