Narach Investment

TECHNICAL ANALYSIS: STOCK PRICES AND MOMENTUM INDICATORS


It would be relevant for investors to look at the momentum of the stock prices in consonance with the price volume charts of the stocks they may have under study for investment at a later date and while making decisions with respect to their investments in the stock markets. Momentum would in itself be a measure of the velocity of a price move whether upward or downward; and would revolve in and around the study of select indicators like the rate of change (or the ROC), the relative strength (or the RSI), the moving average convergence divergence (or the MACD) and the stochastic indicators.

These momentum indicators while sharing similar characteristics would find differences in their interpretation while augmenting the investment decision making process whether on the buy side or sell side. It would be relevant for the investor to have an understanding of the concept and construction underlying the momentum indicators he may select to apply as adjuncts to the price volume charts of the stocks he may have under study.

While investors study the price volume charts of the stocks under investigation along with the moving averages, Fibonacci studies and select momentum indicators; it would be with a view to identify trend reversals at an early stages of its build up into a subsequent bull phase or bear run. The investor would appreciate that a trend whether upward or downward would be in force till evidence proves it to be to the contrary. Further, that all such indicators do fail on occasion; thus requiring the investor to monitor more than one such momentum indicator.

Usually these momentum indicators are studied with reference and regard to time frames, which may be segregated into the short-term, intermediate-term and long-term; and would approximate time periods of 3 to 6 weeks, 6 to 39 weeks and 1 to 2 years, respectively. Investors who may have an active investment strategy in play would normally be monitoring the short-term and the intermediate-term trends to enable efficiencies with respect to their investment decision making process which may otherwise not be available; in spite of which the investor would be required to have an understanding of the present direction of the said trend and where the market as well as the stocks under study may be positioned in its regard. For instance, if the trend is downward, then for investors to adopt long positions would be unprofitable even if the short-term momentum were to show that it would be favourable; it would be the downward weight of the longer-term momentum indicators which would supersede and maintain the otherwise downward trajectory of the stock price.

These momentum indicators are usually plotted and placed below the price chart of the stocks the investor may have under study for onward investment at a later date for ease of monitoring and comparison. The prudent investors would indeed apply more than one momentum indicators to enable a consensus view with regard to identification of present trend, the present position of the stock (or even the market) in relation to this trend and expected trend reversal points on the chart. Some savvy investors would also apply more than one time span with regard to the individual momentum indicators under study to enable a study of the crossovers to substantiate the identification of these expected trend reversal points. The underlying objective of such study would be to identify whether the weight of the evidence at hand points towards a trend reversal and a shift in its momentum.

Momentum indicators belong to one of two categories; namely, the overbought/oversold indicators and the divergence indicators. While the former deals with the overbought and oversold conditions of the stocks under study and expected trend reversal; the latter would deal with the study of the measure of this reversal of the momentum trend itself. The underlying assumption being that when the momentum changes direction, the change in the direction of the stock price would follow.

Trend line violation techniques and the moving average crossovers may be applied equally well to both the price charts of the stocks under study as well as the momentum. It would be important for the investor to understand that a trend reversal in momentum would be just a reversal in momentum; and would usually turn alongside the price with a time lag. However, just because the trend direction of a momentum indicator has changed does not necessarily mean that the price of the stocks under study would change as well. However, under normal conditions a momentum trend reversal would imply a price trend reversal signal and would be supplementary to the validation of the actual trend reversal in the price of the stocks under study. So, the actual buy or sell signals with regard to the stocks under study would be generated and based on the actual reversal in the price trend and not on the bases of a reversal in the momentum indicator and its series.

To conclude, the various momentum indicators applied by investors as supplementary to the price volume charts of the stocks they may have under study for onward investment would enable a consensus view with regard to identification of present trend, the present position of the stock in relation to this trend and expected trend reversal points on the chart; as trends do persist and repeat themselves into the future. On the flip side, there would be others who would opine that there are no magic numbers with regard to monitoring and following of these momentum indicators, oscillators or otherwise; while some sequence series may have worked well in the past, they may not oblige in the future. This would be so, when the market and stock prices are in an uptrend or a downtrend based on fundamental factors both micro-economic as well as macro-economic. Despite the above, the investor would need to relate the study of such select momentum indicators which may add value to his investment decision making process.