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Mass
Index
Description
The
Mass Index, popularized by Tushar Chande and
Donald Dorsey (see the June 1992 issue of Technical
Analysis of Stocks & Commodities magazine),
is calculated by summing an exponentially smoothed
moving average of the daily ranges (High-Low) over
25 periods.
The
Mass Index is designed to identify reversals in
trend by measuring the narrowing and widening of
the average range between the high and low prices.
As the range widens, the Mass Index
increases. As
the range narrows, the Mass Index decreases.
Interpretation
The
most significant pattern to watch for is called
the "reversal bulge."
A reversal bulge occurs when a 25 period
Mass Index rises above 27 and subsequently falls
below 26.5. A
reversal in price is likely once the Mass Index
falls below 26.5. The
overall direction of prices (i.e., trending or
trading range), is unimportant.
A
9-period exponential moving average is used to
determine whether the reversal bulge indicates a
"buy" or "sell" signal.
Since the Mass Index attempts to predict
reversals in trend, positions should be taken by
buying if the moving average is trending down and
selling if the moving average is trending up.
Since trends can fail to reverse, stop-loss
orders should be placed with new positions. |
