SMI Indices Technical Analysis and SMI Indices Trading Signals

Developed by William Blau.

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

Construction of SMI

This stock indices indicator is calculated by comparing the stock indices 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 indices price is greater than the average of the range, the SMI will move up.

When the closing stock indices 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.

Indices Technical Analysis and Generating Indices Trading Signals

Buy and Sell Indices Trading Signals/ Crossover Signals

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

Divergence Indices Trading

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

Bearish Divergence