Stochastic Momentum Index (SMI)

Developed by William Blau in 1993, it is an extension of the Stochastic Oscillator indicator, only calculated slightly different (it regards the mid range instead of the true range of the price per period).

Why should I use it?

The SMI is a smoother version of the Stochastic Oscillator (less erratic and more even in its movement), therefore you can use it in a similar way you use the Stochastic Oscillator- Finding overbought/oversold levels, and using crossovers between the SMI lines as buy and sell signals.
Because it is smoother, the SMI is more controlled and in tone with the market, therefore it has a greater chance of filtering out false signals.
Try to insert both the Stochastic Oscillator and the SMI on the same chart, it will help you understand the difference between the two.

How does it look like?

The SMI is composed out of two lines.
The first is the %K line which is the main line of the indicator, and is also called the signal line.
The second is the %D line which is the dashed line.
Notice that the SMI can have any value between 100 and -100, meaning it can get negative values as opposed to the Stochastic Oscillator which can have only positive values.

How does it work?

Two common ways to read the SMI indicator:
As an overbought/oversold indicator:
The price is oversold when the SMI drops under -40, a buy signal is triggered the next time the SMI move back above -40.
The market is overbought when the SMI rise above +40, a sell signal is then triggered the next time the SMI move back below +40
Crossover signals:
You can also regard the crossing of the solid %K over the dashed %D line as buy or sell signals in the following way:
When the solid line (%K) crosses the dashed line (%D) from below upwards it will indicate a buy signal.
When the solid line (%K) crosses the dashed line (%D) from above downward it will indicate a sell signal.

Example

In the example below the SMI is providing a good sell signal in two different ways:
The first on Nov 23 when the %K line is moving under the %D line indication a sell.
The second sell signal was around Dec 7 when the SMI crossed back under the oversold level +40.
In this case, following the two sell signals was a sharp drop in the market price.