It measures the difference between the current price and the price n periods ago of a financial instrument. If the difference is above the 100-line and rising then it is presumed that the uptrend is accelerating. If the difference is below the 100-line and falling then the downtrend is accelerating. If the difference is above the 100-line and falling then the uptrend is decelerating. Similarly, if the difference is below the 100-line and rising then the downtrend is decelerating. Momentum follows the general oscillator analysis:
- A crossing of the oscillator above the 100-line triggers a buy signal.
- A crossing of the oscillator below the 100-line triggers a sell signal.
- Divergence between the oscillator and price gives early signals of a reversal.
- Overbought/Oversold levels are not easily spotted on the Momentum Oscillator since it is unbounded. Hence, visual inspection is used instead, to identify extreme readings above and below the 100-line.