By momentum I assume you mean velocity since momentum = mass x velocity and mass is constant or irrelevant in time series data analysis. Velocity is rate of change of price per unit time. That's, on average, called the trend. It isn't velocity you are so interested in as change of velocity, acceleration or deceleration. The moving average difference gives you a proxy of acceleration or deceleration. This is essentially trend line analysis which is used universally. You don't need to compute ma's to assess trend lines. All you need is a chart, a straight edge, and a pencil.
I think trend line decision making is as good as any other including fundamentals, so if I say ma's don't tell you anything, you have to understand what I mean. They don't predict the future state that is critical in trading. The do tell you the current instantaneous state if the price deviation exceeds some standard. say, a Bollinger band. Such a deviation implies a state change, but there is no a priori valid expectation based on that deviation that tells you future state. Specifically, the price may rebound and deviate right back up to where it was. What can you then conclude? You might say that if the deviation was caused by a few big blocks, and then if big guys know something inside, then you had better take notice. Just remember that such reasoning does not predict future state because big guys can be wrong for the right reasons. They can be right about selling, but others may disagree.
An example: check the chart in NT. A few weeks ago some huge block was sold and knocked the stock down. I noticed and made some disparaging remarks on the NT thread. They threw rotten apples and tomatoes at me and drove me away for my heresy. The stock bounced back, based at a high level, and then advanced to a fifth count Elliot and has now broke down through the intermediate uptrend. The earnings report showed that NT revenue growth had slowed substantially so that there's no way it can sustain the multiple it wore. NT is now being invited out to a raping. It's a fine company, but it is only beginning a nasty downside. The trend line follower will note that it gave some time for traders to sell when it broke through it's tight uptrend last Thursday. The ma follower would still be holding because no ma is sensitive enough to discern this cut. However, a rebound in the averages may help NT to recover so that the ma analysis may eventually get you out maybe even at better prices. The difference is the disciplined trend line player is out now. The market could be in the first phase of a translation without backup. It's easier on you to be on sidelines, if you're a trader. |
