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The Chande Momentum Oscillator

The Chande Momentum Oscillator (CMO) can be used like the Relative Strength Index (RSI). If you were to compare extreme readings for the CMO and RSI, a CMO of 50 would be comparable to an RSI of 70 and a CMO of 60 would be comparable to an RSI of 80. A CMO of -50 would be comparable to an RSI of 30 and a CMO of -60 would be comparable to an RSI of 20. However, the Chande Momentum Oscillator measures momentum directly by combining data for both up and down days in the numerator of its equation (The RSI uses up days only in its numerator). In addition, the Chande Momentum Oscillator or CMO does not have any built-in smoothing that would obscure very short-term momentum extremes (RSI has such smoothing and tends to obscure these details). The scale ranges from -100 to +100, letting you easily see changes in net momentum relative to the 0 level. The bounded scale also enables you to compare values across different securities. The red lines in the above chart mark the -50 and +50 levels of the indicator. The heavy black line is the zero line. The Chande Momentum Oscillator indicates overbought (+50) and oversold (-50) conditions. For example, at –50 the downside momentum is 3 times the upside momentum. Readings above +50 or below -50 are extreme, and often occur shortly before a reversal in price direction. The Chande Momentum Oscillator can also be used to measure the degree to which the market is trending. The sign of the CMO indicates the direction of the trend. The more extreme the CMO reading, the stronger the trend. A low CMO reading (close to "0") indicates the market or stock is neutral or in a sideways trading range. The Chande Momentum Oscillator can help establish entry and exit points when used in conjunction with a trend-following indicator, such as a moving average. For example, if a moving average has turned positive, you could enter the market when the Chande Momentum Oscillator is advancing (the CMO, unlike a moving average, does not lag the market) and exit when it moves lower or when the moving average gives a sell signal. The moving average can give you the buy or sell bias and the CMO can function as your "trigger." Finally, look for divergences between the action of the Index (or stock) and that of the CMO. For example, if the Index is making a new high (or low) and the Chande Momentum Oscillator is failing to surpass its previous high (or low), the CMO is "anticipating" a reversal in the Index.

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