An oscillator that measures the momentum of the market.
Overview
Chande’s Momentum Oscillator (CMO) was developed by Tushar Chande and explained in the book “The New Technical Trader” by Tushar Chande and Stanley Kroll. The CMO attempts to measure what Chande refers to as “pure momentum”.
The CMO calculation uses data for both up moves and down moves in the numerator, directly measuring momentum. Using unsmoothed data allows for short-term extreme movements to be less hidden. However, smoothing is an option . Plotted as an oscillator, the scale is bound between +100 and -100 thus allowing the user to clearly see changes in net momentum using the 0 level as a balance point.
Chande’s CMO plotted on the GBP/CHF Daily Chart 4/10/2011
Source: VT Trader
Interpretation
The Chande Momentum Oscillator provides several interpretations and signals:
Overbought/oversold Conditions: The primary method of the CMO is suggestion of extreme overbought or oversold conditions. Chande identifies the market as overbought with levels above +50 and the oversold with levels below -50. At +50, up-move momentum is three times the down-move momentum; At -50, down-move momentum is three times the up-move momentum. These levels essentially correspond to the common 70/30 levels used with Chande’s DMI and J. Wells Wilder’s RSI indicator.
Divergence: Although not specifically mentioned in Chande’s book, looking for divergence between the CMO and the instrument’s price may be a valid method of interpreting lost momentum similar to the interpretation of divergences in other oscillators.
Adding CMO Trigger Line: An example is adding a 9-period moving average to the 20-period CMO. Buy when the CMO crosses above the 9-period MA trigger line; sell when it crosses below it.
Trendiness: The CMO can also be used to measure the degree of trendiness an instrument exhibits. Higher CMO values correspond to stronger, sharper trends while lower values of CMO indicate a possible trading range or choppy action.
