# A momentum gauge and the overbought myth

> See what a 0–100 momentum gauge actually measures, compute one by hand, and watch a "too high" reading stay high for weeks while the price keeps rising.

- Course: [Trading Basics: How It Works, How Not to Lose Everything](https://productovi.com/courses/trading.md)
- Module: Which tools are worth my time?
- Lesson 22/32, ~27 min
- Source: https://productovi.com/courses/trading/momentum-gauge

## A dial from 0 to 100

**Alex Tutor:** Back on your Pebble practice account, today's tool is a dial. Pebble shows a **momentum** gauge under every chart: a number from 0 to 100. Nora has a theory about it.

**Nora:** Above 70 means **overbought**: too many buyers, so the price has to drop. I sold my Northwind Foods the first day it hit 70. Smart, right?

![Nora points excitedly at a big dial whose needle sits in the high blue zone; Marc glances at it calmly beside a path that keeps climbing, and Alex looks on with a phone.](https://productovi.com/courses/trading/diagrams/m6-l2-scene.png)

**Alex Tutor:** Let's first see what the number is. Pebble's gauge looks at the last 10 daily changes in the close. It adds up the rises, adds up all the movement, rises and falls together, and asks: what share of the movement was up?

$$
\text{gauge} = 100 \times \frac{\text{sum of rises}}{\text{sum of rises} + \text{sum of falls}}
$$

*Over the last 10 daily changes; falls counted without the minus sign*

**Sofia:** So 100 means every one of the 10 days closed higher, and 0 means every one closed lower.

**Alex Tutor:** Yes. And 50 means the ups and downs were the same size. That's all it measures: the direction of recent movement. It knows nothing about value, buyers' moods or tomorrow.

**Nora:** But some apps print "overbought" in red letters!

**Alex Tutor:** A label isn't evidence. A word like "overbought" sounds like a verdict, but the arithmetic underneath is only rises against falls.

> **Exercise:** Match each gauge reading with what it says about the last 10 daily changes.

## Computing one reading

**Alex Tutor:** Here are 60 days of Northwind Foods with the daily change and the gauge. Nora's day was 2025-12-26, the first time the gauge reached 70.

**Dataset (CSV):** [Northwind Foods, 60 days with the momentum gauge](https://productovi.com/datasets/trading/momentum-gauge/m6_nwf_momentum.csv)

Practice market data on Pebble, 2025-12-08 to 2026-02-27. The gauge needs 10 changes, so it starts on day 11.

- `date`: Trading day
- `close`: Closing price, dollars
- `change`: Close minus the previous close
- `gauge`: Momentum gauge, 0–100, over the last 10 changes

**Alex Tutor:** The 10 changes up to that day, from 2025-12-15: +0.31, +0.22, −0.46, −0.19, +0.02, +0.37, +0.26, +0.06, +0.29, +0.18. The rises add up to 1.71; the falls to 0.65.

**Nora:** Do I really have to add these up by hand?

**Alex Tutor:** Once. After that you'll know what the app is doing, and the number stops being a mystery with a scary name.

> **Exercise:** Compute the gauge for 2025-12-26: rises 1.71, falls 0.65. Round to a whole number.

**Alex Tutor:** Your turn with a falling stretch. Same recipe, different direction.

> **Exercise:** A made-up window of 10 daily changes: +0.10, −0.30, −0.25, +0.05, −0.40, −0.20, +0.15, −0.35, −0.10, −0.30. Compute the gauge. Round to a whole number.

**Alex Tutor:** One more detail people miss: does the gauge count up days, or something else?

> **Exercise:** On 2025-12-26 Northwind Foods' gauge read 72. That means 72% of the last 10 days closed higher.

## "Overbought" for weeks

**Alex Tutor:** Now Nora's theory. She sold at 33.20 on 2025-12-26. Look at what the gauge and the price did next.

**Northwind Foods, the momentum gauge**

| date | Gauge |
| --- | --- |
| 2025-12-08 |  |
| 2025-12-09 |  |
| 2025-12-10 |  |
| 2025-12-11 |  |
| 2025-12-12 |  |
| 2025-12-15 |  |
| 2025-12-16 |  |
| 2025-12-17 |  |
| 2025-12-18 |  |
| 2025-12-19 |  |
| 2025-12-22 | 56 |
| 2025-12-23 | 66 |
| 2025-12-24 | 65 |
| 2025-12-25 | 65 |
| 2025-12-26 | 72 |
| 2025-12-29 | 73 |
| 2025-12-30 | 70 |
| 2025-12-31 | 90 |
| 2026-01-01 | 99 |
| 2026-01-02 | 99 |
| 2026-01-05 | 95 |
| 2026-01-06 | 94 |
| 2026-01-07 | 94 |
| 2026-01-08 | 94 |
| 2026-01-09 | 94 |
| 2026-01-12 | 93 |
| 2026-01-13 | 95 |
| 2026-01-14 | 95 |
| 2026-01-15 | 96 |
| 2026-01-16 | 96 |
| 2026-01-19 | 100 |
| 2026-01-20 | 89 |
| 2026-01-21 | 88 |
| 2026-01-22 | 88 |
| 2026-01-23 | 88 |
| 2026-01-26 | 88 |
| 2026-01-27 | 86 |
| 2026-01-28 | 88 |
| 2026-01-29 | 89 |
| 2026-01-30 | 89 |
| 2026-02-02 | 88 |
| 2026-02-03 | 100 |
| 2026-02-04 | 100 |
| 2026-02-05 | 100 |
| 2026-02-06 | 100 |
| 2026-02-09 | 100 |
| 2026-02-10 | 95 |
| 2026-02-11 | 72 |
| 2026-02-12 | 73 |
| 2026-02-13 | 74 |
| 2026-02-16 | 71 |
| 2026-02-17 | 72 |
| 2026-02-18 | 62 |
| 2026-02-19 | 46 |
| 2026-02-20 | 34 |
| 2026-02-23 | 32 |
| 2026-02-24 | 28 |
| 2026-02-25 | 34 |
| 2026-02-26 | 19 |
| 2026-02-27 | 9 |

**Northwind Foods, close**

| date | Close |
| --- | --- |
| 2025-12-08 | 32.12 |
| 2025-12-09 | 31.85 |
| 2025-12-10 | 32 |
| 2025-12-11 | 32.33 |
| 2025-12-12 | 32.14 |
| 2025-12-15 | 32.45 |
| 2025-12-16 | 32.67 |
| 2025-12-17 | 32.21 |
| 2025-12-18 | 32.02 |
| 2025-12-19 | 32.04 |
| 2025-12-22 | 32.41 |
| 2025-12-23 | 32.67 |
| 2025-12-24 | 32.73 |
| 2025-12-25 | 33.02 |
| 2025-12-26 | 33.2 |
| 2025-12-29 | 33.53 |
| 2025-12-30 | 33.56 |
| 2025-12-31 | 33.65 |
| 2026-01-01 | 33.64 |
| 2026-01-02 | 33.84 |
| 2026-01-05 | 33.77 |
| 2026-01-06 | 33.78 |
| 2026-01-07 | 33.98 |
| 2026-01-08 | 34.26 |
| 2026-01-09 | 34.33 |
| 2026-01-12 | 34.54 |
| 2026-01-13 | 35.05 |
| 2026-01-14 | 35.07 |
| 2026-01-15 | 35.18 |
| 2026-01-16 | 35.33 |
| 2026-01-19 | 35.66 |
| 2026-01-20 | 35.42 |
| 2026-01-21 | 35.54 |
| 2026-01-22 | 35.78 |
| 2026-01-23 | 35.82 |
| 2026-01-26 | 36.06 |
| 2026-01-27 | 36.23 |
| 2026-01-28 | 36.54 |
| 2026-01-29 | 36.85 |
| 2026-01-30 | 36.96 |
| 2026-02-02 | 37.19 |
| 2026-02-03 | 37.31 |
| 2026-02-04 | 37.43 |
| 2026-02-05 | 37.89 |
| 2026-02-06 | 38.08 |
| 2026-02-09 | 38.07 |
| 2026-02-10 | 37.98 |
| 2026-02-11 | 37.48 |
| 2026-02-12 | 37.89 |
| 2026-02-13 | 38.08 |
| 2026-02-16 | 38.07 |
| 2026-02-17 | 38.27 |
| 2026-02-18 | 37.98 |
| 2026-02-19 | 37.71 |
| 2026-02-20 | 37.35 |
| 2026-02-23 | 37.2 |
| 2026-02-24 | 36.7 |
| 2026-02-25 | 36.7 |
| 2026-02-26 | 36.57 |
| 2026-02-27 | 36.32 |

**Nora:** Wait. It stayed at 70 or above every single day until 2026-02-17? That's... 38 trading days.

**Marc:** And the close went from 33.20 to 38.27 in that time. A strong, steady climb keeps the gauge high, because most days are up days. That's what the gauge measures.

> **Exercise:** By how many percent did the close rise from 33.20 (2025-12-26) to the highest close, 38.27 (2026-02-17)? Round to one decimal.

**Sofia:** So "overbought" can just mean "it's been rising a lot lately".

**Alex Tutor:** Exactly. In a strong trend the gauge can sit high for weeks. And the opposite reading, "oversold" below 30, can sit low for weeks in a strong fall.

**Nora:** I'd have had 507 dollars more on 100 shares!

**Marc:** Only before costs, and only if you'd sold at the very top, which nobody does. The point isn't the missed money. The point is that a reading of 70 said nothing about timing.

> **Exercise:** When the momentum gauge goes above 70, the price must fall soon.

## What it can and can't do

**Nora:** So the gauge is useless?

**Alex Tutor:** It's a description: "the last two weeks were mostly up" or "mostly down". It can't time a turn. The evidence that a fixed line like 70 predicts reversals is weak, and every claim you see should come with many trades, after costs.

**Marc:** The turn did come, in the end. After 2026-02-17 the gauge fell to 9 and the close to 36.32. But nobody could have known the date from a reading of 70 in December.

**Alex Tutor:** So the turn came. Does that prove Nora right after all?

> **Exercise:** After 38 days above 70, Northwind Foods' gauge fell to 9 by 2026-02-27 and the close to 36.32. Nora sold at 33.20 on 2025-12-26. What does this show?

**Marc:** On my chart the gauge sits in a corner. I glance at it like a speedometer for the last two weeks, and that's all.

> **Exercise:** What does a reading of 95 on Pebble's gauge tell you?

**Alex Tutor:** Now explain it to Nora, who still thinks she was smart.

**Nora:** Go on, convince me.

**Sofia:** With her own numbers, then.

> **Exercise:** Nora says: "Above 70 means overbought, so the price has to fall. Selling at 70 was smart." In 2–3 sentences, explain with the Northwind Foods numbers what the gauge measures and why that rule failed here.

> **Key ideas**
>
> - Pebble's **momentum** gauge = 100 × rises ÷ (rises + falls) over the last 10 daily changes.
> - It measures the direction of recent movement: 100 all up, 50 balanced, 0 all down.
> - "**Overbought**" above 70 only means the recent days were mostly up. Northwind Foods stayed there 38 trading days and rose another 15.3%.
> - The gauge describes; it doesn't time turns. Evidence that a fixed line predicts reversals is weak.

> **Educational, not advice**
>
> This course explains how trading works; it never tells you what to buy or sell. Most people who trade lose money, and you can lose all of it. For taxes and rules, ask a licensed professional where you live.

- Previous lesson: [Moving averages](https://productovi.com/courses/trading/moving-averages.md)
- Next lesson: [Volume and volatility](https://productovi.com/courses/trading/volume-and-volatility.md)

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