There are many different types of technical analytic indexes and information you may use in your analysis of a companies trends and momentums. Three of these that you should definitely use are the directional movement index (DMI), the relative strength index (RSI), and the Williams %R. The DMI is a trending type of index while the other two are momentum indexes

The DMI has a negative component to it. When it is trending upward, it indicates a continuation of the downward trend. When it is trending downward, it indicates an upward trend. The positive component of DMI is just the opposite of the negative component. Many investors who watch the directional movement index will watch for the point of when the positive and negative indicators cross each other as indicated in the chart below. The arrows point to two examples of when the indicators cross.

You can see from this example of the company Syntel, Inc (SYNT) that the trend indicators did work according to theory. In the case of the left arrow, when the negative indicator crossed above the positive indicator, the price of the stock went down and the opposite happened in the case of the right arrow when the price of the stock went upward.

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Here is another example of the DMI indicator.

You can see the crossover points from where the arrows are pointing.

The relative strength index analyzes the magnitude of a stocks gains
and its losses over a period of time. The formula is:

100 minus 100/1+RS where RS is the average of the number of days of up closes
divided by the average of the number of down closes.

The actual calculation is as follows: Using 14 periods, sum the gains and divide by 14 to arrive at the first average RS. You would then multiply this average by 13 and add one more periods gain. You would then do the same for the losses for the same period. To really be accurate, you should start back 28 periods to arrive at the first average for the 28th – 15th periods and then take a rolling average for the next 14 periods. The more periods you use the more accurate it will be.

You will then divide the average gains RS by the average loss RS to arrive at the RSI for the period of time being evaluated. The closer the RSI is to 70, the closer it is to being overbought. Conversely,
the closer it is to zero, the closer it is to being oversold.

In looking at the above chart from Syntel, Inc. (SYNT) you can see that the middle indicator is the RSI line. It is fairly constant but has at the end turned upward to be close to the top of the graph.
This would indicate that the stock should turn downward. We would need to watch it to see if that actually happens. If you were to look back at the period where the arrow is pointing you would see that the stock price actually did go down right after that day indicating that the RSI was correct.

The Williams %R is the last trend line in the above graph. This indicator shows the close of the day in relation the high price and the low price of the past number of days. The formula is:
%R = highest high for the period of time being reviewed – most recent close divided by the highest high – lowest low for the same periods.

It is also used to indicate if a stock is supposedly overbought or over sold. As you can see from the above graph, it is a bit more volatile than the RSI graph. This graph is opposite of the RSI in that if the line is at the zero to -20 it is considered overbought and if it is from -80 -100 it is considered oversold. One thing to remember with the %R is that overbought may not mean that it is time to sell and over sold is not meant to mean that it is time to buy. A stock price can remain at a overbought situation for some time. The trader analyzing this indicator should wait until it is obvious that there has been a swing in the price. One idea would be to wait until the indicator crosses the mid point in the graph or to observe some other technical analytic indicators.

Have some fun with these three indicators. Play with them and see if they will work for you with your trading strategy. You might look back at some other stocks and see if what you thought would happen did in deed happen. Another thought would be to test your theory with a paper online game before actually investing your own money.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

Tags: DMI, RSI, technical analytic indicators, Williams %R