Basic Momentum Principles Presented by Martin J. Pring www.pring.com

Three Points to Take Home. 1. Prices are determined by psychology, people’s attitude to the emerging fundamentals not the fundamentals themselves. 2. Keep things simple and apply common sense at all times. 3. Only use approaches that make sense to you. www.pring.com

Definition of Technical Analysis: The art of identifying a price trend reversal at a relatively early stage and riding on that trend until the weight of the evidence shows or proves that the trend has reversed. www.pring.com

In technical analysis we are dealing in probabilities, never certainties. www.pring.com

The hopes and fears of all market participants are reflected in one thing ….the price !! www.pring.com

Technical analysis assumes that prices move in trends. www.pring.com

Trends have a tendency to perpetuate. www.pring.com

Prices in any freely traded market are determined by the attitude of all market participants to the underlying fundamentals. www.pring.com

“A trend is a trend is a trend “A trend is a trend is a trend.” Always assume the prevailing trend is in existence. www.pring.com

There is no known technique for determining the duration and exact magnitude of a price move. We can only recognize a change in direction. www.pring.com

It doesn’t matter what time frame you are following... …the principles of technical analysis remain constant. www.pring.com

The only difference is; the longer the time frame, the greater the significance of any given trend reversal. www.pring.com

It doesn’t matter what security you are following... …the principles of technical analysis remain constant. www.pring.com

Now for Momentum! www.pring.com

Momentum (Oscillator) Price Momentum (Oscillator) www.pring.com

Momentum is a generic term. www.pring.com

Rate of Change RSI MACD Stochastic www.pring.com

These are all momentum indicators www.pring.com

Momentum indicators share common characteristics, much like fruit. Fruit is sweet Fruit is almost always grown in the warmest season Divergences apply to all momentum indicators Overbought/oversold lines can be drawn on all momentum indicators www.pring.com

Actual buy and sell signals can only come from a reversal in the trend of the price . . . Not . . . the momentum series. www.pring.com

. . . doesn’t mean that prices will also! …..but they usually do! Just because oscillators change direction . . . www.pring.com

Momentum’s valuable contribution is to tell us when the underlying technical structure is weakening, or strengthening. www.pring.com

There are two broad momentum categories: 1. Momentum characteristics Characteristics dealing with overbought, oversold conditions, divergences etc. 2. The identification of trend reversals in the momentum indicator itself You can apply trendline violations, moving average crossovers and price pattern completions, etc., to momentum. www.pring.com

Momentum Characteristics 1. Overbought/oversold 2. Divergences 3. Characteristics in bull and bear markets www.pring.com

Momentum Characteristics 1. Overbought/oversold www.pring.com

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The news is so good, I am certain to make money if I buy now!! Take partial profits Overbought Equilibrium Oversold www.pring.com

Cover at least part the of short position The news is so bad only a fool would buy now !!! Cover at least part the of short position Overbought Equilibrium Oversold www.pring.com

Additional profit Overbought premature www.pring.com

Better timing www.pring.com

The Rate of Change www.pring.com

The rate of change is probably the easiest momentum indicator to construct. www.pring.com

The golden rule of technical analysis should be: Don’t cast away an indicator just because it’s simple, reject it because it doesn’t work. www.pring.com

The rate of change lends itself handsomely to overbought and oversold interpretations. www.pring.com

The problem is that there are no hard and fast rules about where the lines should be drawn… www.pring.com

The problem is that there are no hard and fast rules about where the lines should be drawn… …because the magnitude of the oscillations will vary according to the volatility of the underlying security and the time being considered. www.pring.com

Phelps Dodge Lines are too close 13-week ROC www.pring.com

Phelps Dodge Lines are too far apart 13-week ROC 13-week ROC www.pring.com

Lines not perfect, but better placed Phelps Dodge Lines not perfect, but better placed 13-week ROC www.pring.com

Silver 30-day ROC www.pring.com

The RSI www.pring.com

The RSI, or Relative Strength Indicator, is a momentum indicator and should in no way be confused with the principle of comparative relative strength. www.pring.com

Benefits of the RSI vs. ROC: 1. It is less volatile. 2. The RSI falls within the finite boundaries of 0 and 100. 3. Constant overbought/oversold trading bands applicable to all securities.

British Pound Overbought at 70 14-day RSI Oversold at 30

The magnitude of the oscillations of the RSI are inverse to that of most other momentum series.

Overbought/oversold are at 70 and 30 for both series Hang Seng Overbought/oversold are at 70 and 30 for both series 9-day RSI 65-day RSI www.pring.com

Overbought/oversold now at 80/20 Hang Seng Overbought/oversold now at 80/20 9-day RSI 65-day RSI Overbought/oversold now at 62.5 and 37.5 www.pring.com

The true meaning of “long” and “short” time spans.

Proctor and Gamble (daily) Proctor and Gamble (mthly) 40-day RSI 2-month RSI OB/OS at 65/35 OB/OS at 85/15

Suggested Alternative RSI Time Spans Daily Weekly Monthly 9 13 14 26 12 30 39 18 45 52 24

Benefits of the RSI vs. ROC: 1. It is less volatile so erratic movements minimized. 2. The RSI falls within the finite boundaries of 0 and 100. 3. Constant overbought/oversold trading bands applicable to all securities. 4. The RSI makes comparison between different securities easier.

45-day ROC DJ Utilities Phil Gold & Silver 45-day RSI

Use Trendlines as confirmation Canadian Dollar Overbought confirmation Oversold confirmation No confirmation No confirmation RSI 14 www.pring.com

Be mindful of the time frame when you see a signal.

General Motors Monthly General Motors Daily General Motors Monthly 2-year decline 45-day decline www.pring.com

MSCI Emerging Markets (EEM) RSI (14)

Momentum Characteristics 1. Overbought/oversold 2. Divergences www.pring.com

In the description of overbought and oversold conditions, we assumed the oscillator peaks and troughs at roughly the same time as the price . . . www.pring.com

. . . but momentum often turns ahead of the price. www.pring.com

C B A Negative divergence www.pring.com

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Everything looks good!! www.pring.com

Weak momentum is warning of trouble ahead Momentum Price Weak momentum is warning of trouble ahead Momentum www.pring.com

Divergences must be confirmed by the price. www.pring.com

Confirmation can come from… 1. Trendline breaks 2. Price pattern completions 3. Moving average crossovers www.pring.com

Weak momentum finally confirmed by price www.pring.com

In one respect, markets are like houses, they take longer to build than tear down. www.pring.com

Divergences also appear at market bottoms, where they are called positive divergences, because momentum hits bottom before the price. www.pring.com

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A B Positive divergence www.pring.com

Sugar Confirmation Positive divergence 10-day ROC www.pring.com

Coca-Cola RSI 14 www.pring.com

Virtually no upside momentum at final peak

Virtually no upside momentum at final peak Sharp decline Virtually no upside momentum at final peak

Virtually no downside momentum at final low

Followed by a sharp rally Virtually no downside momentum at final low

Barely below zero at final low. Chennai Petroleum Barely below zero at final low. 10-day ROC

Japan ETF (EWJ) ROC (14)

Momentum Characteristics 1. Overbought/oversold 2. Divergences 3. Characteristics in bull and bear markets www.pring.com

Prices in any freely traded market are determined by the attitude of all market participants to the underlying fundamentals.

Keycorp Earnings up Price down Earnings Earnings up

Keycorp Earnings up Price down Earnings Earnings up

Price sideways to down Ebay Earnings Up Ebay Earnings

Calculating a Price Oscillator S&P Composite 13-week moving average. S&P Composite (1/13 Price Oscillator) Price oscillator appears on the next chart.

Stock Sentiment vs Stock Momentum S&P Composite (1/13 Price Oscillator) Bullish Advisors 1/13 Price Oscillator* * Source Investors Intelligence.com

Stock Sentiment vs Stock Momentum S&P momentum Bullish advisors momentum

Bond Sentiment vs Bond Momentum Govt Bond Prices) Bond Bulls (10-week MA)* 14-week RSI (10-week MA) *Source Market Vane www.pring.com 90 90

Primary bear market lasts 1 to 2 years Primary bull market lasts 1 to 2 years www.pring.com

. . . means that the price will very likely rally. Oversold in a bull market . . . www.pring.com

. . . probably means the top of the rally. Overbought in a bear market . . . www.pring.com

Followed by a trading range Overbought in a bull market www.pring.com

Oversold in a bear market Followed by a trading range Oversold in a bear market www.pring.com

Doesn’t necessarily result in much of a rally Oversold in a bear market www.pring.com

Goldman Sachs Commodity Index Bull trend Bear trend Bear trend Extreme overbought is a bull market characteristic 30-day ROC www.pring.com

Goldman Sachs Commodity Index Extreme overbought is a bull market characteristic 30-day ROC www.pring.com

S&P ETF (SPY) RSI(14)

Two Broad Ways of Interpreting Momentum 1. Momentum characteristics 2. Identifying momentum trend reversals www.pring.com

Techniques 1. Trendlines 2. Price Patterns 3. Moving Averages www.pring.com

Techniques 1. Trendlines www.pring.com

Momentum must be confirmed by price www.pring.com

Momentum must be confirmed by price. www.pring.com

Gold Trust ETF (GLD) ROC (30)

CDN $ (Weekly) 39-week ROC

China ETF (FXI) RSI (14)

S&P ETF (SPY) RSI (14)

S&P Composite 12-month RSI

Techniques 1. Trendlines 2. Price Patterns www.pring.com

Confirmation Rectangle www.pring.com

Head and shoulders Head and shoulders Confirmation S H www.pring.com

S H Coca-Cola Confirmed 6 weeks later S H RSI 14 www.pring.com

Google ROC (45)

Procter & Gamble RSI (14)

Caterpillar S H 14-day RSI S H

Warning: Breakout is coming from an overbought level Whipsaw S H Warning: Breakout is coming from an overbought level S H www.pring.com

Higher highs Comcast Overbought Lower highs 10-day ROC

Techniques 1. Trendlines 2. Price Patterns 3. Moving Averages www.pring.com

Smoothing of raw data www.pring.com

Bad sell signal www.pring.com

MA of MA www.pring.com

Canadian Dollar/Yen 45-day ROC 30-day MA 10-day MA of 30-day

Canadian Dollar/Yen (daily) 45-day ROC (30/10)

Straits Times Smoothed RSI (8/9)

Google MACD

China ETF (FXI) Dallas Cowboys

The End www.pring.com

The Special K

Market Cycle Model Primary reversal realized some way from the actual peak. Ideal place for a sell signal Short-term trend 2 to 6 weeks Intermediate trend 6 weeks to 9 months Investors should be positioning themselves at the lower end of the green bell curve. Traders need to know the direction of the main trend. When you are looking at any indicator make sure you know the type of trend it is reflecting. If a whipsaw is going to arise it will usually develop in a counter-cyclical way. When an indicator does not operate correctly it may provide a clue that the rally or reaction in question is a counter cyclical one. Primary trend 9 months to 2 years Source: Yelton Fiscal

Now Becomes…. Market Cycle Model Short-term trend Special K 2 to 6 weeks Special K Now Becomes…. Intermediate trend 6 weeks to 9 months Investors should be positioning themselves at the lower end of the green bell curve. Traders need to know the direction of the main trend. When you are looking at any indicator make sure you know the type of trend it is reflecting. If a whipsaw is going to arise it will usually develop in a counter-cyclical way. When an indicator does not operate correctly it may provide a clue that the rally or reaction in question is a counter cyclical one. Primary trend 9 months to 2 years Source: Yelton Fiscal 131

Market Cycle Model The top Price S H The bottom Special K 132

CRB Composite Special K

CRB Composite Special K