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Most weeks we talk about momentum in the charts we examine. By momentum we mean the extent to which the price action is inherently strong or weak and is likely to remain so. To measure momentum several indicators have been developed down the years. Most times, to keep things simple, we focus on the RSI, or Relative Strength Indicator, as developed by the American market analyst Welles Wilder back in 1978, and not to be confused with simple relative strength where the price of a stock is commonly compared to a market index to see if it is behaving more or less strongly than the market in general. No, the RSI is an indexed measure the shows the relationship between average of rises in prices and the average falls over a set number of price bars.

Obviously if prices are in an up trend then you would expect over time that average price rises to exceed that of falls and visa versa. So an up trend in the RSI is seen as positive for trend and a decline signals weakness. If prices move too violently the indicator also signals this by moving to an extreme value, typically either above 70 or below 30 and such moves can often coincide with a top or bottom occurring. Chart patterns, along with support and resistance and trend lines can also feature in analysis of the RSI and sometimes these moves are more easily seen on the indicators line than in the corresponding price movement.

One feature we talk about a lot in this column is momentum divergence. This occurs when successively higher peaks or lower troughs in price action are not replicated in the momentum study. If prices make lower troughs but the lows in momentum are not incrementally lower then we have positive divergence and might look for other indications that a low is forming. Conversely higher peaks in price that do not produce corresponding higher peaks in momentum signal negative divergence and potentially warn of a top. Other indicators that can be used to interpret momentum include the popular Stochastic that in essence measures the extent to which the close price of a bar is nearer to the high or low of the bar range and again is averaged over a given time window.