What is the EOM indicator?
An indicator that highlights the relationship between price and volume and is particularly useful when assessing the strength of a trend. As implied by its name, it is used to measure the ease of movement in price. It is a volume-based oscillator that fluctuates above and below the zero line.
- In general, when the oscillator is above zero, the price is advancing with relative ease.
- When the indicator is below zero, the prices are declining with relative ease.
A wide range (difference between highs and lows) on low volume implies that price movement was relatively easy, as it did not take much volume to move prices.
Alternatively, a small range and large volume indicates that price movement was difficult as there was a relatively small price movement on high volumes.
Other important things to remember with EOM
- The closer the EMV line is to zero, the less ease of movement on that specific period.
- The bigger the spike in the EMV line, the more ease of price movement, either positive (if above the zero line) or negative (if below the zero line).
The ease of movement indicator can also be used as an average, by adding together various single-period ease of movements and dividing them by the number of periods being considered. By smoothing out the indicator over time it can be used to identify trends and areas of convergence/divergence.
A graphic example
Let’s review the EOM indicator by using it in a real-life example which took place at the beginning of Dec ‘18.
Using the Wall Street 30 min chart we can see a correlation between the EOM indicator and subsequent market movements at the opening of the session on Monday. Looking at the chart below you can see there is a positive spike in the EOM line which holds for a few periods before it starts declining.
The cause for the spike is likely to have been the bullish (but cautious) reaction to a ceasefire between the US and China on trade tariffs. This could have meant that traders were holding Wall Street pushing the price higher, however maybe not as many people bought into the rally, therefore creating a big range on low volume.
- After the initial positive reaction from the markets, traders could have become more sceptic about the viability of the ceasefire, and therefore a more bearish reaction comes in to play. This increases the range as lower lows appear maintaining the EOM at a high level.
- As more and more traders become sceptic, highs become lower, decreasing the range, which paired with a stable volume results in a declining EOM line.
As you can see from the graph, the EOM line reacts before the actual price does, as a tightening range indicates that investors are becoming more bearish, which can eventually lead to a decline in price if it sustained over a period.