Momentum Indicators at Trade10.com- The science of trading market momentum for stocks, options, futures and bonds.

Critical Day Analysis

Our critical day analysis is all about trend reversals. We tell you when there is a high potential for a reversal of the short trend and we've been doing it since 1994 with an 80%* accuracy.

Trade10 Home | Advertisement Opportunities | Recent Signals

Home

QuoteChart Opinion Profile

Enter Symbol:

WALK THROUGH A CRITICAL DAY

OUR SERVICE

MARKETS

UNDERSTAND THE CHARTS

JOIN!!!

Momentum Indicators

Momentum is the changing velocity of a price when related to security analysis. Momentum indicators are designed to track momentum in the price of a tradable to help identify the relative enthusiasm of buyers and sellers involved in the price trend development. Some indicators compare the closing price today with some historical price so many periods before, others construct trend lines like the MACD. Others like the Stochastic is a ratio using the high, low and close values on various days. Momentum can be measured in some fashion in many different ways. Interpretation of Momentum indicators can be highly specific to the indicator but many share some basic interpretation features. A momentum indicator can diverge from price either by producing a series of lower highs (or peaks) when price continues to produce higher highs (peaks) or vice versa. The troughs can also diverge, where either the indicator troughs are making higher lows while price is making lower lows or vice versa. When a divergence between price and momentum occur it often can provide indication of the expected path of future prices. Good technicians know that a divergence can remain in existence for a long period of time and so know that it is a good idea to see price reverse first before making trading decisions. It is also important to realize that a divergence between momentum indicators and price does not always result in the anticipated move. In the chart below of the S&P100 (OEX), a divergence between the peaks of the Relative Strength Index and price is indicated by a blue line above the peaks. At the same time a divergence of the troughs is occurring where the troughs of the RSI are moving higher while price troughs are successively lower. A trendline drawn on the relative strength index is penetrated in mid February 2001. This provides supporting evidence for the path of future prices. For the OEX below, the penetration after a divergence of the peaks is supporting evidence that we may see falling prices result for the index.

Momentum indicators can exhibit price patterns that give bias to future price activity like this inverted head and shoulders pattern on the chart of Bausch & Lomb below. A head and shoulders pattern on an indicator or on the price of the security itself provides evidence of future price development but requires supporting evidence to become a tradable event. In the case of Baush & Lomb below, the arrow indicates the point where the MACD indicator breaks above the neckline after forming the right shoulder of the inverted head and shoulders pattern. The breaking of the neckline suggests that a continuation of a rising price trend may result for near term prices. As with all technical indications of future price activity, traders should find other supporting fundamental or technical evidence of prices in developing any trade decision. The pattern below precedes rising prices for the next 3 months followed by a sharp drop in prices in July 2000. Often traders will look at the time it took for the original pattern to develop and use this loosely as the expected time frame of the resulting market price trend should the pattern prove successful. The inverted head and shoulders pattern took approximately 3 months to form suggesting that market prices following the pattern might exhibit a similar period where price continues in the rising price trend.

Momentum indicators can often be interpreted using oversold and overbought conditions specific to each indicator or by looking for zero line crossovers or in the instance of MACD, crossovers of two moving averages. Stochastic and Williams %R can be interpreted using crossovers from overbought or oversold territories into the center area of the indicators.

MACD Signal

This is an example of an inverted head and shoulders pattern on a MACD 26 day EMA. Price patterns when they appear in Momentum indicators can give indication of trend reversals or otherwise the direction of the next leg of the expected trend. An inverted head and shoulders pattern is a trend reversal pattern that indicates that price will break away from the down trend leading into the pattern and rise on penetration of the neckline.

The blue arrow on the price graph indicates the point at which there is penetration of the neckline in the head and shoulders pattern that forms on the indicator. This is the buy signal.

Generally, price projections can be made by measuring the price change from the peak of the head to the neckline and then projecting that distance from the point of breakout in the direction of the breakout. It is often better to project the percentage change that occurred between the peak and the neckline when prices are low. Other times analysts will use the point change.

To the right technical studies are examined in more detail to provide a sense of conformational evidence for traders of the critical day. Click on any of the terms to take a closer look at a technical discussion on that topic. All formations, patterns, indicators and technical tools fail at various times and so should only be used to build a body of evidence in forming a trading decision rather than being solely relied upon. There are a number of valuable studies that lead to intuitive understandings about price and volume but a strong compliment to technical analysis is an understanding of the trends and changes in the fundamentals and economic activity that ultimately lead valuation levels in the markets.

Walk through a critical day

The graphs show a price plot of the Dow Jones Industrials from Sept 28/00 to early November. The First graph ends on November 3/00, two days before an upcoming critical day on November 7/00. Our members looking at the market are expecting a trend reversal to occur due to the high rate of success in our research. Ideally a member will be using their own skills to judge the supply and demand changes, using technical and fundamental indications to confirm suspicions of a reversal, and trade accordingly.
On the second graph we see that the price action on November 6 was a bullish day, reversing the short trend so that the short trend leading into the critical day is now up. A critical day is an expectation of a reversal of the short trend that immediately precedes the critical day. In the case of the November 7 signal, given to members 3 days before, is an indication that the upward moving trend, recognized at the close of November 6 is expected to reverse direction.
On the third graph we can see that November 7 was a low volatility after a large gain on November 6 of about 160 points for the Dow Jones Industrials. The subsequent move over the three days following the November 7 signal saw the Dow Jones Industrials fall 376 points. The next day, November 13, the Dow Jones Industrials lost an additional 83 points with intra-day low a full 609 point loss since the open on the critical day.

Most recent signals

A closer view of the most recent signals. You can see the short trend immediately prior to a successful critical day, reverses coming away from the critical day. Often a failed critical day will indicate a stronger bias in the market for continuation of the trend that was in place prior to the critical day. A failed signal can therefore provide as much information and opportunity as a successful one. Take a look at tech studies to develop a sense of trend reversals and use.

Tech Studies

Comparative Relative Strength

Congestion Pattern

Consolidation