Market Call: Microsoft Mark Seleznov
Oct 5 1999
Microsoft NASDAQ:MSFT
Technology | Quote | News | Research
On the charts in this column everyday is the Momentum indicator. Some call it the Rate of Change indicator.
Definition:
The Momentum indicator or Rate of Change indicator is a popular study available in most analytical charting programs. The use of the indicator can vary from trader to trader. Most use it as a trend following indicator; while others use it as an oscillator to help pinpoint possible overbought and over sold conditions.
The indicator measures the rate of change in price as opposed to price itself. It is calculated by subtracting the price of x periods ago from the price now. This indicator can also be referred to as rate-of-change (ROC). As with most indicators and studies, it can be used on various time frames. The same calculation is used for 5 minute, 15 minute, 60 minute or daily price bars. We use it here with 60-minute bars.
To reduce the choppiness of the indicator, I prefer a longer period. I then apply a Moving average of the indicator to further smooth this very volatile indicator when using with short time periods. The chart below reflects the smoothed 5 period exponential moving average derived from a 22 period Momentum indicator on 60-minute bars.
Interpretation:
The conventional interpretation is to use momentum as a trend-following indicator. This means that when the indicator peaks and begins to descend, it can be considered a sell signal. The opposite conditions can be interpreted when the indicator bottoms out and begins to rise.
If momentum reaches very high or low values relative to its range historically, a continuation of the current trend is likely, and a change might not be considered until the actual price begins to dip down or rise, respectively. As with all technical indicators, it is often useful to verify the signals you are interpreting with other indicators
Let's look at Microsoft Corporation (NASDAQ: MSFT)
>From the chart below, you can see how MSFT stock moves in relationship to the Momentum indicator. Each time Momentum indicator changes at a plus reading, the stock runs out of Momentum and turns down. Each time the downward Momentum stops and the indicator turns up, the stock rallies.
I like to combine the Momentum indicator with some of my other favorite indicators like MACD and Moving Average Crossovers.
You can see from the chart below that these indicators are also gave a Buy signal today. I would Buy MSFT on any positive movement in the morning. I would place my stop at 91.
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