While most people ponder life’s big questions—the purpose of existence, the mysteries of the cosmos, or why socks vanish in the laundry - I find myself captivated by financial indicators. Riveting, right? But here's the thing - when you're obsessed with squeezing insights from data, even the humblest of indicators can start to look like treasure maps. And that's how the Smoothed Mean Reversion Index (SMRI) was born.
What Is the SMRI?
Think of the SMRI as your financial market's emotional thermometer. It gauges how far the market has drifted from its usual behavior by blending three key ingredients:
- Price Deviation
- RSI (Relative Strength Index) Deviation
- Volume Deviation
Instead of staring at these factors separately like they're distant relatives at a family reunion, SMRI pulls them together into a cohesive story. It's designed to identify moments when the market is acting… well, a little dramatic. You know, those times when prices soar like they’ve had too much caffeine or crash like they just realized it’s Monday.
How Does the SMRI Work?
Alright, time to peel back the layers. Here’s the step-by-step magic behind SMRI:
1. Standardizing Deviations (a.k.a. Z-Scores)
First, we measure how far each data point (price, RSI, volume) deviates from its own moving average. Think of it like comparing today’s weather to the average temperature for this time of year. Is it unusually hot (overbought)? Or freakishly cold (oversold)?
But here’s the kicker: not all data plays fair. Prices, RSI, and volume have different scales, so we standardize them using z-scores. This levels the playing field, like converting all currencies to dollars before comparing them.
2. Calculating the SMRI
Once we have these z-scores:
- Price Deviation (Z-score): How far the price is from its 14-week average.
- RSI Deviation (Z-score): How much the current RSI differs from its smoothed average.
- Volume Deviation (Z-score): How extreme current volume is compared to typical activity.
We average these three to get the SMRI. That’s it. No secret sauce. Just clean, statistically sound math.
3. Smoothing for Clarity
Since markets love to be noisy (like that one colleague who never stops talking in meetings), we apply a smoothing technique. This filters out the random blips and keeps the focus on genuine trends.
Interpreting the SMRI Output
When you look at the SMRI chart, you’ll see a line that oscillates above and below a baseline (zero). Here’s what those wobbles mean:
- Above 0: The market is running hotter than usual. Prices, momentum, and volume are elevated.
- Below 0: Things are cooling off. The market's energy is lower than average.
But let’s get more specific:
Buy Signals (Oversold Conditions)
- SMRI at -1.0 or Lower: This is like seeing a stock left out in the cold without a jacket. It’s oversold, potentially undervalued, and could be ripe for a bounce. Think of it as finding your favorite coffee shop is offering 50% off—it might be time to buy in.
- Watch for Reversal: The real sweet spot? When SMRI starts moving up from these negative levels, signaling a shift from pessimism to renewed demand.
Sell Signals (Overbought Conditions)
- SMRI at +1.5 to +2.0 or Higher: Here, the market’s been partying a little too hard. Prices are frothy, RSI is overheated, and volume is off the charts. It might be time to take some profits before the hangover hits.
- Confirmation: When SMRI peaks and starts to decline, it’s often a sign that bullish momentum is fizzling out. That’s your cue to consider selling.
Neutral Zone (Nothing to See Here... Yet)
- SMRI Around 0: This is the market’s version of chilling on the couch. Prices, momentum, and volume are behaving normally. Not too hot, not too cold - just hanging out in equilibrium.
How to Use SMRI Effectively
- Don’t Use It Alone: SMRI is powerful, but it’s not a crystal ball. Combine it with other indicators like trend lines, support/resistance levels, or moving averages.
- Divergence is Gold: If the price makes a new high, but SMRI doesn’t, that’s called bearish divergence. It’s like someone claiming they’re happy while frowning - something’s off.
- Adjust for Trends: In strong bullish or bearish trends, SMRI can stay extreme for longer than expected. Adjust your buy/sell thresholds accordingly.
Quick Takeaways
- Buy Zone: SMRI at -1.0 or below, especially if it starts rising from there.
- Sell Zone: SMRI at +1.5 to +2.0 or above, especially when it begins to fall.
- Neutral Zone: SMRI hovering around 0, indicating balanced market conditions.
Final Thoughts
The SMRI isn’t here to replace your existing technical charts - it’s here to add depth to your analysis. It’s like adding a dash of seasoning to a dish. It won’t change the core ingredients, but it might just bring out flavors you didn’t notice before.
So the next time you’re staring at a chart wondering if the market is overcooked or underdone, let SMRI be your taste tester. And if you find it useful, let me know - because while others dream of fame and fortune, I’ll be over here dreaming about data (again).
Part of the Experimental Charts
The SMRI is part of the Experimental Charts collection. Over time, the most useful and insightful indicators will earn their spot on the main charts page. You can access these experimental charts for any ticker directly from their chart page. If you find an indicator particularly valuable, let me know - your feedback helps shape which tools make the cut and evolve further.
