A momentum gauge and the overbought myth

Momentum is how strongly the price has been moving in one direction lately. Pebble shows it as a gauge from 0 to 100 under every chart.

The gauge looks at the last 10 daily changes in the close and asks one question: what part of all that movement was up?

• 100: every change was a rise.
• 50: rises and falls were the same size.
• 0: every change was a fall.
• Something like 72: roughly three-quarters of the movement was up.

That is the whole content of the number. It knows nothing about a company's value, the mood of buyers or tomorrow's close. Apps often paint the top of the dial red and print a word such as "overbought" there, which makes a description of the last two weeks look like a verdict. A label is not evidence: underneath it there is only arithmetic of rises against falls.

Pebble's gauge has a short recipe:

1. Take the last 10 daily changes of the close (today's close minus yesterday's).
2. Add up the rises.
3. Add up the falls, without the minus sign.
4. Gauge = 100 × rises ÷ (rises + falls).

Northwind Foods, 2025-12-26. The 10 changes from 2025-12-15 are +0.31, +0.22, −0.46, −0.19, +0.02, +0.37, +0.26, +0.06, +0.29, +0.18.

• Rises: 0.31 + 0.22 + 0.02 + 0.37 + 0.26 + 0.06 + 0.29 + 0.18 = 1.71.
• Falls: 0.46 + 0.19 = 0.65.
• Gauge: 100 × 1.71 ÷ 2.36 ≈ 72.

Doing this once by hand matters more than the number. After it, you know the app isn't reading minds: it is dividing two sums. Apps use slightly different recipes and windows, so the same chart can show different readings; the idea, the share of recent movement that was up, stays the same.

The same recipe works in a fall. When most of the recent movement is down, the rises are small next to the falls and the gauge drops towards 0. Many apps label readings below 30 oversold, the mirror image of "overbought" above 70.

A worked example on a made-up window of 10 changes: rises 0.10 + 0.05 + 0.15 = 0.30; falls 0.30 + 0.25 + 0.40 + 0.20 + 0.35 + 0.10 + 0.30 = 1.90. Gauge: 100 × 0.30 ÷ 2.20 ≈ 14.

A 14 says one thing: the last two weeks were mostly down. It doesn't say the price is cheap or that a bounce is due. In a strong, steady fall most days are down days, so the gauge can sit below 30 for weeks while the price keeps sliding. Buying "because it's oversold" is the same mistake as selling "because it's overbought", just in the other direction.

A common misreading is that a gauge of 72 means "72% of the days were up". The gauge weighs how big the rises and falls were, not how many days went each way.

Northwind Foods, the 10 changes up to 2025-12-26: eight rises and two falls. Counted by days, that is 80% up. But the rises were small (from 0.02 to 0.37, 1.71 together), and one fall alone was 0.46. In size, the falls add up to 0.65, so the gauge is 100 × 1.71 ÷ 2.36 ≈ 72, not 80.

Two consequences follow. One big day can move the gauge a lot, in either direction. And two charts with the same number of up days can show very different readings. That is one more reason to treat the gauge as a rough summary of recent movement and to look at the price itself before reading meaning into a number.

In a strong, steady climb most days are up days, so the share of upward movement stays high and the gauge stays high. "Overbought" above 70 then means little more than "it has been rising a lot lately".

Northwind Foods on Pebble shows how long that can last. The gauge first reached 70 on 2025-12-26, with the close at 33.20. That is the day Nora sold. The gauge then stayed at 70 or above every day until 2026-02-17: 38 trading days. Meanwhile the close climbed to 38.27.

The rise she missed: (38.27 − 33.20) ÷ 33.20 × 100 ≈ 15.3%, or 507 dollars on 100 shares, before costs. Nobody sells at the exact top, so the missed money isn't the lesson. The lesson is that a reading of 70 said nothing about when the climb would end.

The word "overbought" sounds like a law: too many buyers, so the price has to come down. Nothing in the gauge supports that. The number is built only from past changes; there is no part of it that measures buyers, value or what happens next.

So a high reading has two possible stories. Either the climb is about to fade, or it is a strong trend that keeps going. The gauge looks the same in both, and you only learn which one it was afterwards. On Northwind Foods, the first reading of 70 was followed by 38 more trading days above 70 and a 15.3% rise.

The evidence that a fixed line such as 70 (or 30 at the bottom) reliably predicts reversals is weak. Any rule built on it needs a record of at least 30 trades, after costs, in trends and in ranges, before it earns any trust.

Every climb ends some day. So when a high reading is followed, weeks later, by a fall, it is tempting to say the gauge "was right". That is hindsight: judging a signal by an outcome you only know afterwards.

Northwind Foods after 2026-02-17: the gauge slid from 72 to 9 by 2026-02-27, and the close fell from 38.27 to 36.32. A real turn. But look at it from Nora's side. She sold at 33.20 on 2025-12-26. Even at the end of February the close was 36.32 − 33.20 = 3.12 above her price. And on the day she sold, nothing in the gauge said whether the end would come in a week or in two months.

A useful signal has to say something about when, often enough, after costs, on many trades. "Eventually" fits every reading and so tells you nothing.

Put together, the gauge is a speedometer: it tells you how one-sided the last 10 days were, and nothing else. A reading of 95 means almost all of that movement was up; 9 means almost all was down.

That can still help. A glance at it stops you from calling a strong climb "quiet", or from reading one up day in a slide as a turn. It is not a value meter, a buyer counter or a timer, and the words "overbought" and "oversold" add no information to the number.

Marc, the experienced trader in this course, keeps it in a corner of his chart and glances at it the way a driver glances at a speedometer. He never trades a reading on its own, and he would want 30 or more trades after costs before trusting any rule built on it.

How it fits together: the gauge divides recent rises by all recent movement, so it describes direction; high readings last in trends, and "eventually" proves nothing. The next lesson, Volume and volatility, looks at how much the price usually moves and how many shares change hands.