3 Strength Indicators for Assessing Stock Momentum

A stock's RSI measures the speed and magnitude of its recent price changes, which can help determine whether it might be overbought or oversold and therefore potentially ready for a reversal.

RSI can be calculated using any time frame, but traders often measure a stock's price movement over the past 14 trading days, because it's sensitive enough to capture short-term price swings but not so sensitive that it will pick up too much noise.

Measured on a scale of 0 to 100, RSI typically respects the following boundaries:

• Below 30 may indicate the stock is oversold and could soon rebound.
• Above 70 may indicate the stock is overbought and could soon decline.

That said, some stocks operate in narrower or wider RSI ranges, so it's important for traders to determine a stock's customary range to inform a trade.

Additionally, an RSI reading may remain overbought or oversold for long periods, so traders often wait until the RSI crosses back below or above those levels, respectively, before placing a trade.

Traders will also look for divergences—when the stock's price and its RSI move in opposite directions—as well as corroborating signals from other indicators, such as ADX, to confirm a potential reversal.

MACD is used to assess the power of a stock's price movement by subtracting its 26-day exponential moving average (EMA) from its 12-day EMA. When the difference is:

• Greater than zero, the short-term trend is considered stronger than the long-term trend, which may indicate upward momentum.
• Less than zero, the long-term trend is typically seen as stronger than the short-term trend, which may indicate downward momentum.

However, MACD is most often used in combination with its signal line—the nine-day EMA of the MACD—to help spot weakening trends and possible reversals. When a stock's MACD crosses above or below the signal line (i.e., convergence), that's typically interpreted as a potential buy or sell signal, respectively.

The farther away the MACD moves from its signal (i.e., divergence), the stronger the momentum—but if this distance widens too much, it could indicate a potential reversal.

ADX measures the strength of a stock's or an index's price movement, which helps traders determine whether a trend is forming, underway, or has the potential to reverse.

ADX readings are on a scale of 0 to 100 and are calculated using the average negative or positive price movement over a given period—typically 14 days. When a stock's ADX is:

• Below 20, it generally is interpreted as a nontrending or sideways market, during which range-bound strategies—in which traders buy at the support trend line and sell at the resistance trend line—are likely to be most interesting to traders.
• Above 20 and moving toward 25, this could be seen by traders as an entry point—especially if it coincides with corroborating signals, such as a price breakout above a moving average.
• Above 25, the trend is typically interpreted as strong. If it's over 40, it's often seen as very strong—and if it keeps moving higher, it might indicate that the stock may soon peak. Conversely, when the ADX dips back below 25, it may be seen by traders as a time to exit the trade.

As with most technical analyses, each of these indicators can provide a clue—not the complete answer. While RSI, MACD, and ADX values can help gauge a trend's strength, they may be more informative when combined with other confirming signals. Plus, traders often watch for signs of trend exhaustion—such as weakening volume—that could lead to a reversal, and consider the bigger picture, such as whether the broader market is trending in the same direction.

Trading momentum with confidence begins by layering multiple data points and following a strong exit discipline.