The stochastic oscillator is a technical indicator of momentum used to compare closing price to range of price over a given period of time. This oscillator is sensitive to fluctuations in market price, although the level of fluctuation in the indicator can be smoothed somewhat by altering the time period being measured. The theory behind the stochastic oscillator is fairly basic: The price of a security closes at its high in a market with an uptrend, and similarly, closes at its low in a market with a downtrend.
The SMI is considered a refinement of the stochastic oscillator. It calculates the distance of the current closing price as it relates to the median of the high/low range of price. William Blau developed the SMI in an attempt to provide a more reliable indicator, less subject to false swings.
The SMI has a normal range of values between +100 and -100. When the present closing price is higher than the median, or midpoint, value of the high/low range, the resulting value is positive. When current closing price is lower than that of the midpoint of the high/low range, the SMI has a negative value. Like the stochastic oscillator, the SMI is primarily used by traders or analysts to indicate overbought or oversold conditions in a market. Traders also use the SMI as a general trend indicator, interpreting values above 40 as indicative of a bullish trend and negative values greater than -40 as showing a bearish trend.