What is the Intraday Momentum Index?

The Intraday Momentum Index, or IMI, is a technical indicator that combines aspects of candlestick analysis with the relative strength index (RSI). The intraday indicator was developed by Tushar Chande to provide investors with a way to find optimal days to buy and sell.

Understanding the Intraday Momentum Index (IMI)

Investors use technical indicators to estimate when a stock should be bought or sold. Technical analysis, which uses technical indicators, examines the relationship between stock price and volume over varied periods of time. Indicators, such as the relative strength index and Bollinger Bands, seek to generate buy and sell signals without examining a stock’s fundamentals. As such, they are generally considered more useful for short-term traders than long-term investors.

The Intraday Momentum Index looks at the relationship between a stock’s open and close price over the course of the day, rather than how the open/close price varies between days. It combines some features of the relative strength index, namely the relationship between up closes and down closes and whether there is an indication that a stock is overbought or oversold, with candlestick charts. Candlestick charts for a given day contain a “real body” highlighting the gap between the open and close price, and price points above the high and low called upper and lower shadows.

Technical analysts can use the IMI to anticipate when a stock is overbought:

IMI=(d=1nGainsd=1nGains+d=1nLosses)×100where:Gains=Closing priceOpening price, on up days – i.e. close>openLosses=Opening priceClosing price, on down days – i.e. open<closed=Daysn=Number of days (14 is typical)\begin{aligned} &\text{IMI} = \left ( \frac{ \sum_{d=1}^{n} \text{Gains} }{ \sum_{d=1}^{n} \text{Gains} + \sum_{d=1}^{n} \text{Losses} } \right ) \times 100 \\ &\textbf{where:} \\ &\text{Gains} = \text{Closing price} - \text{Opening price, on up days -- i.e. close} > \text{open} \\ &\text{Losses} = \text{Opening price} - \text{Closing price, on down days -- i.e. open} < \text{close} \\ &d = \text{Days} \\ &n = \text{Number of days (14 is typical)} \\ \end{aligned}IMI=(d=1nGains+d=1nLossesd=1nGains)×100where:Gains=Closing priceOpening price, on up days – i.e. close>openLosses=Opening priceClosing price, on down days – i.e. open<closed=Daysn=Number of days (14 is typical)

The IMI is calculated as the sum of gains on up days divided by the sum of gains on up days plus the sum of losses on down days. This is then multiplied by 100. If the resulting number is greater than 70 then the stock is considered overbought, while a figure less than 30 means that a stock is oversold. The investor will look at the IMI over a period of days, with 14 days being the most common time frame to look at.

Example of the Intraday Momentum Index

Let's take a look at the Intraday Momentum Index applied to the SPDR S&P 500 ETF (SPY):

Intraday Momentum Index Chart

The chart above shows how oversold or overbought IMI readings can generate buy and sell trade signals on a popular index. While these signals aren't always accurate, they may provide a greater degree of accuracy than simply using the RSI. Many traders combine these insights with other forms of technical analysis to maximize their chances of a successful trade. For example, they may look for oversold conditions and a breakout from a chart pattern before entering into a long position.