The Stochastic Momentum Index was developed by William Blau as introduced in the in the January 1993 issue of Technical Analysis of Stocks & Commodities. While similar to the Stochastic Oscillator, the SMI displays where the close is relative to the midpoint of the recent high/low range, as compared to the close relative to the recent high/low with the Stochastic Oscillator.
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 (blue) and the moving average of the SMI (red). 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. 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.
As always, before basing any trades on strict overbought / oversold levels it is recommended that one first qualify the trendiness of the market using an indicator such as R-Squared. If indicators suggest a non-trending market, then trades based on strict overbought/oversold levels should produce the best results.
The Slow Stochastic charts the daily stochastic as well as a five-day moving average of a 12-day interval.
This smoothing of the Stochastic Oscillator is an attempt to reduce volatility and improve signal accuracy.
As with the other stochastic indicators, the signals to look for are oversold securities with values are less than 20 and overbought when greater than 80.
Stochastics work best in broad trading ranges, or in a mild trend with a slight upward or downward bias. The worst market for normal use of stochastics is a persistent trending market that has only minor corrections. It is possible to trade stochastics in a trend by ignoring the usual overbought and oversold levels and entering the market when the end of a reaction against the trend is signaled by a stochastic crossover from any level.