DEFINITION of 'Disparity Index'
A technical indicator that measures the relative position of the most recent closing price to a selected moving average and reports the value as a percentage. A value greater than zero suggests that the asset is gaining upward momentum, while a value less than zero can be interpreted as a sign that selling pressure is increasing.
BREAKING DOWN 'Disparity Index'
Extreme values of this indicator can be a very useful tool for contrarian investors to foretell periods of exhaustion. Once the price is excessively pushed in one direction, there are very few investors to take the other side of the transaction when the participants wish to close their position, ultimately leading to a price reversal. Similar to the ROC indicator, important signals are generated when the indicator crosses over the zero line because it is an early signal that momentum is building.
To learn how to use the disparity index in your trading, check out Why is the disparity index indicator important to contrarian investors?