The Intraday Momentum Index (IMI) was developed by Tushar Chande. It represents a cross between the RSI (Relative Strength Index) and the candlestick analysis.

The RSI calculation and the IMI one are very similar to each other, except for the use of the relationship between the intraday opening and closing prices to determine whether the day is above the open (up day) or below the open (down day). In the case of the Rsi, instead, the difference between the closing of today and the previous one is taken into account for the construction of the indicator.

On a candlestick chart, the IMI separates the black and white candlesticks and calculates the RSI  on the candlestick bodies.

Assuming an IMI on a 14 time frame, we should consider the days in which the index has closed higher than the opening in the last 14 days periods (it will be shown on the graph with a white candle IMIup), and then relate the sum of these values ​​to a denominator formed by the sum of IMIup and IMIdown.

OVERBOUGHT AND OVERSOLD ON THE  INTRADAY MOMENTUM INDEX

The first graph here below clearly shows how the Intraday Momentum Index is capable of providing indications that the RSI (Relative Strength Index) is not able to report.

The 14-day IMI in the Dow Jones Industrial, from May to October 2013, entered the overbought territory 4 times (i.e. above the classical level of 70) anticipating the 4 peaks of the Dow.; instead, the 14-day RSI entered the overbought only twice, in fact not reporting on time as the IMI  did all the excesses of the market.

The same consideration happened for the bottom of October 2013; the IMI entered the oversold below the threshold of 30, while the  RSI had just approached this level without exceeding it downward.

DIVERGENCES BETWEEN INTRADAY MOMENTUM INDEX AND PRICES

As for many other oscillators, divergences are an essential element of alert of how an excess reached by the price of the underlying asset is not getting a confirmation in the value of the IMI whose trend, following a different path, begins to indicate a possible trend reversal scenario.

So, for example, if the price keeps on rising while the IMI shows decreasing highs, then a top price is imminent and vice versa, if prices keeps on falling, then the IMI that is starting to rise again.

Lets see another graphic example to explain the importance of divergences.

The price of cotton ( DJUBS Cotton) in January 2013 the 14-day IMI rose above the threshold of 70. That move certainly signaled a halt in the rise of the price of cotton with the start of a trading range phase, but certainly not a reversal trend. To reach this conclusion, it was not until March, when the IMI rejoined the peak of January without exceeding it; at that time, the price of cotton was significantly higher than its maximum in January, a classic divergence that was a prelude to a trend reversal.

We can also notice how important the divergence is as an alarm signal also in the next fall of prices.

In April, the IMI fell into the oversold favoring the trend of cotton prices, but once again, a weak phase of the trading range started, instead of a trend reversal. A new downward thrust occurred in May on the price of cotton which achieved a lower low than that of April, with the IMI also falling  down into the oversold, but without being able to touch the minimum levels of April.

Still another divergence of Price & IMI that could alert the trader about the real possibility of a primary low in the making.

INTRADAY MOMENTUM INDEX AND JAPANESE CANDLES TICK

Considering the mathematical formula that generates the Intraday Momentum Index, the Japanese candlestick are a great acknowledgment signal for those who decide to use the IMI as a trading vehicle.

Figures such as the bullish / bearish engulfing pattern, or as the hammer and the shooting star, represent some of the Japanese candlestick that can strongly confirm the trend reversal when the market is in a phase of excesses, whether they are coming from the overbought or the oversold.

Here below another example that explains the concept.

In July, the 14-day Intraday Momentum Index  reached a very strong level of overbought on the platinum spot price, quite close to the threshold of 90 points. This element caused a phase of trading range of the market, but was not enough to create a trend reversal.

The spot price of the platinum in fact, after a few side sessions, began to rise upward and the same happened with the IMI, even though with lower lows respect to the previous ones.

But here is what happened on August 27 th .

The spot price of the platinum touched a high during the opening session and then closed in a sharp decline with a typical figure of inversion known as the bearish engulfing pattern, i.e. the body of the bearish black candle that surrounds the bodies of the two previous sessions.

At that moment, the IMI was sharply diverging by the price of platinum, but it is interesting to note that on that same day the IMI also broke downward its supports.

In fact, we can see all that has been written so far on the Intraday Momentum Index in this example:

1. the achievement of the overbought threshold by the IMI, or a signal of excess on the market, but not a confirmation of a trend reversal;
2. the creation of divergences between the IMI oscillator and prices, a further indication that reinforces the idea of an imminent trend reversal;
3. finally, a series of technical confirmations that allow the trader to operate with greater peace of mind in the new trend direction. The formalization of a clear bearish Japanese candlestick (bearish engulfing pattern in this case), combined with a technical break of the Intraday Momentum Index line, are two fundamental elements that confirm the high probability of success in the opening of a short trade on the platinum.