What started my thinking on this subject is the very good book by Martin Pring called "Market Momentum". IMO this should be required reading for all serious technician. Not only does it cover the very improtant but misunderstood concept of momentum, but also it covers a detailed study of divergent patterns and several indicators, including ROC, MACD, RSI, Stochastics, Williams %R, ADX, Parabolic SAR, TRIX, and a few others. A read through this book will provide the technician a new, detailed understanding of these indicators and related concepts. So as I continue, I may be referring back to this book.
I have some ideas on indicators and how they can interrelate. So I would appreciate feedback on my ideas. Some of them are still in the process of being formulated.
One area that is not covered by any book out there is how the indicators can relate to each other. Lets take a trending stock where a trendline has been established and the price continues to validate the trendline. In a trending situation like this, momentum is the most important characteristic to monitor. This will determine how strong the uptrend is and will also help to determine the length of the run up by looking for evidence of the momentum evaporating. So understanding the concept of momentum and its use as a technical indicator is important, particularily for trending stocks.
Now the momentum of a stock is influence by activity on the stock which is the buying or selling pressure and essentially the moneyflow. If there is upward buying pressure on the stock which relates to money contining to flow into the stock, then momentum will likely follow. Finally, the momentum of the stock relates to its overbought/oversold condition. As long as good momentum has been stablished for the stock and it persists by being for instance in an increasing patterm itself, then this stock has a good chance in moving through regions of resistance that it would not normally be able to so without this momentum. In behaving in this way, good, strong momentum redefines what is considered overbought or oversold for the stock.
So the momentum and its associated indicators can be related to the buy the (side or sell side) activity of the stock, and the overbought/oversold status of a stock. Another way in looking at this is that the buying and selling activity on a stock, revealed in part by moneyflow for instance, can create a context for the momentum to be interpeted in, and the momentum can create a context for the OB/OS indicators to be evaluated in. Each type of indicator provides a piece of the picture. However, there are some indicators that alter the significance of other indicators, which can help to redefine the picture, compared to taking each indicator seperately at face value.
Ultimately, it is the actual price action of the stock that counts. Indicators only can tell what the stock is "predisposed" to do. This is like (but still different) from the economic leading indicators we here about. But the "leading" indicator for stock needs to be confirmed in order to have significance. This is done by the price of the stock. So for example if the OB/OS indicator shows an oversold state, the technician can start to anticipate a halt (consolidation) or reversal to the trend. The trend by definition remains intact until invalidate. The trend is invalidated by a break through its lower trendline. At the same time, this is when the indicator revealing an oversold state is validated. However, until this happens, the OB/OS indicator has not been validate and if the momentum is strong, may not be validated for some time to come.
Any comments or feedback?
Bob Graham |
