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Relative
Momentum Index
Description
The
Relative Momentum Index (RMI) was developed by
Roger Altman. Impressed
with the Relative
Strength Index's sensitivity to the number of
look-back periods, yet frustrated with it's
inconsistent oscillation between defined
overbought and oversold levels, Mr. Altman added a
momentum component to the RSI.
The RMI was first introduced in the
February 1993 issue of Technical Analysis of
Stocks & Commodities magazine.
As
mentioned, the RMI is a variation of the RSI
indicator. Instead
of counting up and down days from close to close
as the RSI does, the RMI counts up and down days
from the close relative to the close x-days ago
(where x is not necessarily 1 as required by the
RSI). So as
the name of the indicator reflects,
"momentum" is substituted for
"strength."
Interpretation
As
an oscillator, the RMI exhibits the same strengths
and weaknesses of other overbought / oversold
indicators. During strong trending markets the RMI
will remain at overbought or oversold levels for
an extended period.
However, during non-trending markets, the
RMI tends to oscillate predictably between an
overbought level of 70 to 90 and an oversold level
of 10 to 30.
Since
the RMI is based on the RSI, many of the same
interpretation methods can be applied.
In fact, many of these
"situations" are more clearly manifest
with the RMI than they are with the RSI.
Tops
and Bottoms: The RMI usually tops above 70 and
bottoms below 30. The
RMI usually forms these tops and bottoms before
the underlying price chart.
Chart
Formations: The
RMI often forms chart patterns (such as head and
shoulders or rising wedges) that may or may not be
visible on the price chart.
Failure
Swings: (Also
known as support or resistance penetrations or
breakouts.) This
is where the RMI surpasses a previous high (peak)
or falls below a recent low (trough).
Support
and Resistance:
The RMI shows, sometimes more clearly than
the price chart, levels of support and resistance.
Divergence:
As discussed above, this occurs when the
price makes a new high (or low) that is not
confirmed by a new RMI high (or low).
Note
that a 20,1 parameter RMI is equivalent to a
20-period RSI. This
is because the 1-day momentum parameter is
calculating day-to-day price changes, which the
standard RSI does by default. As the momentum
parameter is increased, the oscillation range of
the RMI becomes wider and the fluctuations become
smoother. |
