Sigma Score: The second derivative measurement of moving average deviations

Stock prices and deviations above or below key moving averages function like a rubber band. You can stretch a rubber band up to a point - then, it will forcefully and quickly snap back to its previous state. Such is the case with stock prices and moving averages.

While stocks NEED to trade both above and below an average level (that’s why it’s called an AVERAGE), they might spend the majority of the time at a certain distance from that level. That’s where our measurement comes in: the Sigma Score represents, on a scale of -1 to 1 where the current price is trading relative to where it’s usually trading in relation to a moving average.

This method of understanding deviations is far more useful than simply reading a percentage (eg. 6% above the 50-day average). We can sum up the score from the 3 averages that we track (20, 50, 200 days) to get the complete Sigma Score, with possible readings of -3 to 3. Readings above (or below) 1.8 (-1.8) are considered extreme and usually imply a “snap back” is coming soon.