An oscillator that attempts to warn of trend reversals by measuring the narrowing and widening of the average range between the high and low prices.
Overview
Developed by Donald Dorsey and described in his article entitled “The Mass Index” in the June 1992 issue of Technical Analysis of Stocks & Commodities magazine, the Mass Index indicator was designed to warn of upcoming trend reversals. It does this by measuring the narrowing and widening of the average range between the high and low prices. As the price range widens the Mass Index increases and as the price range narrows the Mass Index decreases.
The Mass Index is created by calculating an n-periods moving summation (average) of the ratio of two moving averages. The first moving average is divided by a second moving average (which is actually a moving average of the first moving average). The moving averages ratio is then summed over n-periods to calculate the final Mass Index.
The Mass Index on a daily USD/MXN chart 4/18/2011
Source: VT Trader
Interpretation
According to Dorsey, the “reversal bulge” pattern is the most method of generating potential trading opportunities. A “reversal bulge” occurs when the Mass Index rises above 27 and then declines back below 26.5.
It should be noted that the Mass Index does not indicate market direction. Dorsey suggests using an additional moving average of price to help determine the market direction and classify the “reversal bulge” pattern as a potential buy or sell signal.
