principles of momentum momentum is one of the mostly used techniques of technical analysis but the...

PRINCIPLES OF MOMENTUM

MOMENTUM IS ONE OF THE MOSTLY USED TECHNIQUESOF TECHNICAL ANALYSIS BUT THE LEAST UNDERSTOOD.

MOMENTUM MEASURES VELOCITY OF A PRICE MOVE

YOU CANNOY BUY AND SELL MOMENTUM, YOU CAN ONLYBUY AND SELL THE PRICE

THE 5 MOMENTUM PRINCIPLES TO BE COVERED TODAY ARE :

1. OVERBOUGHT/OVERSOLD

2. DIVERGENCES

3. TRENDLINE VIOLATIONS

4. PRICE PATTERN COMPLETION

5. MOVING AVERAGE SIGNAL

BUY AND SELL SIGNALS CAN ONLY COME FROM A REVERSAL IN TRENDOF THE ACTUAL PRICE, NOT A REVERSAL OF THE MOMENTUM SERIES.

MOMENTUM’S VALUABLE CONTRIBUTION IS TO TELL US WHEN THE UNDERLYING TECHNICAL STRUCTURE IS WEAKENING OR STRENGTHENING

OVERBOUGHT/OVERSOLD

WHEN AN OSCILLATOR TENDS TOWARD THE UPPER PART, IT IS SAID TO BE OVERBOUGHT.

WHEN AN OSCILLATOR TENDS TOWARD THE LOWER PART, IT IS SAID TO BE OVERSOLDS..

LEVELS TO TAKE PROFITS OR REDUCE YOUR EXPOSURE

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OVERSOLD

BOEING

OVERBOUGHT

OVERBOUGHT AND OVERSOLD LEVELS ARE OPPORTUNITY POINTS TO ANTICIPATE A TREND REVERSAL

RISING PRICES, OPTIMISM AND « SCREAMING NESWPAPER TITLES »ARE INCENTIVES TO PURCHASE : THE OPPOSITE SHOULD BE DONE !

IT IS MORE FAVORABLE TO WAIT UNTIL THE OSCILLATORHAS CROOSED THE UPPER BOUND A SECOND TIME

Cisco

                                                                                                                                WAIT ‘TILL IT CROSSES AGAIN…

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OVERSOLD

BOEING

OVERBOUGHT

YOUR PURCHASE PRICE IS LOWER WHEN WAITING FOR THE SECONG CROSS OF THE LOWER BOUND

SHORT-TERM CHARTS : SHORT-TERM OSCILLATORLONG-TERM CHARTS : LONG-TERM OSCILLATOR

IMPORTANCE OF AN OVERBOUGHT/OVERSOLD READING WOULD DEPEND ON THE TIME FRAME UNDER CONSIDERATION

OSCILLATORS THAT MOVE IN THE DIRECTION OF THE PRIMARYTREND NOT ONLY TEND TO REACH MORE EXTREME READINGS, BUT MAINTAIN OVERBOUGHT CONDITIONS LONGER

GRAPH DRAWING TIME !!!

WHAT ARE DIVERGENCES ?

IN THE DESCRIPTION OF OVERBOUGHT/OVERSOLD CONDITIONS, WEASSUMED THAT THE OSCILLATOR PEAKS AND TROUGHS AT ROUGHLYTHE SAME TIME AS THE PRICE

MOMENTUM TURNS AHEAD OF THE PRICE

MAXIMUM VELOCITY AS IT LEAVES THE HAND

REDUCES SPEED AS IT LOSES ITS MOMENTUM

…REACHES A NEUTRAL POSITION WHEN IT REVERSES…

…STARTS GOING DOWN AGAIN…

…ACCELERATES…

…AND FINALLY RETURN TO A NEUTRAL POSITION

WHAT MOMENTUM OSCILLATORS TRY TO DO IS TO MEASURE THIS ACCELERATION AND DEACCELERATION FACTOR

POINT A REPRESENT THE POINT OF MAXIMUM VELOCITY

Oscillator chart

Stock chart

…THE PRICE CONTINUES TO RALLY AT A SLOWER AND SLOWER PACEUNTIL POINT C

Stock chart

Oscillator chart

THIS CONFLICT BETWEEN MOMENTUM AND PRICEIS KNOWN AS DIVERGENCE SINCE THE OSCILLATORIS OUT OF SYNC WITH THE PRICE

IT’S CALLED NEGATIVE DIVERGENCE BECAUSE RISING PRICES IS ASSOCIATED WITH DECLINING MOMENTUM

THE DECLINING MOMENTUM IS ANNOUNCING ADETERIORATION OF AN ONGOING TREND

IN ONE RESPECT, MARKETS ARE LIKE HOUSES: THEY TAKE MORE TIME TO BUILD THAN TO TEAR DOWN

MOST MARKET BOTTOMS ARE PRECEDED BYAT LEAST ONE POSITIVE DIVERGENCE

CHART DRAWING TIME !!!!

RULES FOR INTERPRETING DIVERGENCES

THERE ARE 3 FACTORS THAT HELP ESTABLISH THE SIGNIFICANCE OF A DIVERGENCE :

1. THE NUMBER OF DIVERGENCE

2. THE TIME SPAN SEPARATING THEM

3. THE CLOSENESS OF THE MOMENTUM READING TOTHE EQUILIBRIUM LEVEL AT THE FINAL TURNING POINT IN PRICE

THE MORE DIVERGENCES THERE ARE, THE GREATERTHEIR SIGNIFICANCE

A SPECULATOR WOULD BE INTERESTED IN A STTREND

4 DIVERGENCES IN A LT CHART HAS MORE EFFECT THAN 3IN A ST CHART AS THE ONE BEFORE

THE IMPORTANCE OF DETERMINING THE LEVEL AT WHICHTHE LAST DIVERGENCE TAKES PLACE

OSCILLATOR AT THE EQUILIBRIUM POINT CORRESPONDING WITH MARKET PEAKS ARE GENERALLYFOLLOWED BY STRONG MARKET DECLINES.

THIS IS NOT A RULE BUT WHEN THE TRENDLINE VIOLATION IS CONFIRMED, IN ADDITION TO A LOWDIVERGENCE, A STRONG DECLINE FOLLOWS.

…SAME FOR MARKET BOTTOMS.

DIVERGENCES MUST BE CONFIRMED BY A TREND BREAK IN THE PRICE ITSELF

DIVERGENCES MUST BE CONFIRMED BY A TREND BREAK IN THE PRICE ITSELF

WHEN I TALK OF A CONFIRMATION BY THE PRICE, THE TRENDBREAK CAN COME IN MANY DIFFERENT WAYS :

•TRENDLINE VIOLATION

•MOVING AVERAGE PENETRATION

•PRICE PATTERN COMPLETION

TRENDLINE VIOLATION

•MOMENTUM, LIKE PRICE, MOVE IN TREND.

•KEEP IN MIND THAT A TREND REVERSAL IN MOMENTUM IS USUALY ASSOCIATED WITH A SIMILAR REVERSAL IN THE PRICE ITSELF.

•THE ANALYSIS OF AN OSCILLATOR WILL ACURATELY TELL US THAT THE MOMENTUM HAS REVERSED, AND A REVERSAL IN PRICE MAY SOON FOLLOW

HOWEVER, THE LAG BETWEEN THE SIGNAL OF A REVERSAL INMOMENTUM AND THE ACTUAL TURNING POINT IN PRICE MAY BE SOGREAT THAT TRADING DECISION BASED ON THIS SIGNAL WILL BE UNPROFITABLE.

THAT IS WHY IT IS IMPORTANT TO WAIT FOR A TREND REVERSAL IN THESCEURITY ITSELF

WHO CAN INTERPRET THIS FOR ME ?

BUY AT "A" OR AT "B" ?

A

B

CONFIRMATION OF PRICE PATTERN FORMATION

PRICE FORMATIONS DO NOT OFTEN OCCUR IN OSCILLATORS, BUT WHEN THEY DO :

GET READY !

PRICE PATTERN IN MOMENTUM INDICATORS TAKE THE STANDARD FORMS:

•TRIANGLES

•HEAD AND SHOULDERS

•RECTANGLES

•TRIPLE TOPS

ETC…..

…HEAD AND SHOULDER FORMATION…

MOVING AVERAGE SIGNALS FOR MOMENTUM

MANY TECHNICIANS OFTEN PLOT 2 MOVING AVERAGES.

A-- buy signal B-- sell signal

THANK YOU…..