IMO what you are describing with the eventual breakdown of DELL and the warning signs that were given with respect to the price action and its MAs is that of slowing price momentum. When the price momentum of a stock increases or decreases, it has behavioral characteristics that can be readily identified by the technician. Once momentum decreases enough, then the breakdown of the trend becomes imminent.
Noting the momentum of the stock, its qualities such as signs of it increasing or decreasing is very important in order to monitor the strength of the trend and to be able to evaluate the likelihood of the trend's continuation.
Signs of increasing price momentum:
Supports are respected and resistances are broken through. Respect of smaller length MAs like the 20 day MA. Pullbacks are shallow since there are interests that buy on the dips, which can cause a bounce even where comparatively weak support areas exist. A "ribbon" of MAs can give a nice visual qualitative display to this in how they initially move apart when the stock takes off. If the momentum is increasing, the MAs spread further apart with the shorter MAs increasing slope the most quickly. The stock tends to exhibit improving relative strength in relationship to the rest of the market. This evidences itself for instance in how the stock can maintain pice level and even continue up when the market pulls back. Of course the stock will respect its trendline which may end up having a high slope to it.
However, risk increases the higher the stock price stays above significant MAs that have proven to be respected by the price of the stock. The greater the slope of the trend line, the less likely the stock is to stay in that trend before compramising the trend line. Tape action can help the trader monitor the intraday price action of the stock to see how strong and healthy the trading action is on the stock, and how the stock repsonds to supports and resistances. The tape can be an important tool in managing the risk associated with a trending stock that is moving away from key MAs.
What is interesting is that on a strong breakout of a stock, if the stock manages to pull back to what was the resistance that it broke out from before continuing, then this usually means that the breakout will be accompanied by strong momentum. However, watch out for a bull trap where the price ends up breaking down through the resistance line it broke out from. When this happens, the price can have just as strong of a downward reaction to this failed breakout. Also I find a set of StochRSIs can tell allot about a breakout and the momentum behind it at the time of the breakout. They can make certain characteristic movements with respect to each other when the momentum is strong and can even help the technician asess the likelihood of a breakout. However the StochRSI alone I find an inadequate tool to evaluate the probability of a breakout. This is where tape action and even day to day price action can give important clues of a pending breakout. Also volatility tends to decrease just before a breakout. This can be evidenced by converging MAs and BBs moving closer together.
Note that I have not mentioned the use of the "momentum" indicator? I see the momentum indicator more like a speedometer where its general level tells you where you are but does not necissarily give you ongoing indications of the momentum itself and its likley continuation or change. In other words, the momentum indicator used in this way is rather meaningless to me. However, by looking for S&R and trend of the momentum indicator itself, and divergences from the price trend of the stock, at times the momentum indicator can give you important clues as to the continuation or eventual break down of the stock's trend.
I want to make clear that I see the trend of a stock different than that of its momentum. A trend is just that: a pattern of higher highs and higher lows that is classically evidenced by the price of the stock respecting a trend line. The momentum represents essentially the strength behind the trend.
Paraphrasing from Pring's "Martin Pring on Market Momentum" book:
The term "momentum" specifically refers to the velocity of the price trend. The indicators that describe momentum help the technician determine if the rising trend is accelerating or deaccelerating. Note that momentum is a generic term that is different from the indicator called "momentum". The term momentum embraces a range of specific indicators that attempts to measure this velocity factor.
What is interesting is that not only does price movement come in trends, but so does momentum itself. I find momentum of significance when it is measures as a quality rather than a specific value, for instance in the way it shows up in the price behavior of the stock, the "ribbon" of MAs, and the set of StochRSIs. IMO it is the ability to monitor the strength of a trend that will provide keen insights as to future price behavior and future direction of the trend.
Just some thoughts.
Bob Graham |
