1. Basic Momentum Principles
Presented by
Martin J. Pring

2. 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.

3. 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.

4. In technical analysis we are dealing in probabilities, never certainties.

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

6. Technical analysis assumes that prices move in trends.

7. Trends have a tendency to perpetuate.

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

9. “A trend is a trend is a trend
“A trend is a trend is a trend.” Always assume the prevailing trend is in existence.

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

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

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

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

14. Now for Momentum!

15. Momentum (Oscillator)
Price
Momentum (Oscillator)

16. Momentum is a generic term.

17. Rate of Change
RSI
MACD
Stochastic

18. These are all momentum indicators

19. 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

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

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

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

23. 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.

24. Momentum Characteristics
1. Overbought/oversold
2. Divergences
3. Characteristics in bull and bear markets

25. Momentum Characteristics
1. Overbought/oversold

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

31. 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

32. Additional profit
Overbought premature

33. Better timing

34. The Rate of Change

35. The rate of change is probably the easiest momentum indicator to construct.

36. 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.

37. The rate of change lends itself handsomely to overbought and oversold interpretations.

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

39. 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.

40. Phelps Dodge
Lines are too close
13-week ROC

41. Phelps Dodge Lines are too far apart 13-week ROC 13-week ROC

42. Lines not perfect, but better placed
Phelps Dodge
Lines not perfect, but better placed
13-week ROC

43. Silver
30-day ROC

44. The RSI

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

46. 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.

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

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

49. 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

50. 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

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

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

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

54. 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.

55. 45-day ROC
DJ Utilities
Phil Gold & Silver
45-day RSI

56. Use Trendlines as confirmation Canadian Dollar
Overbought confirmation
Oversold confirmation
No confirmation
No confirmation
RSI 14

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

58. General Motors Monthly
General Motors Daily
General Motors Monthly
2-year decline
45-day decline

59. MSCI Emerging Markets (EEM)
RSI (14)

60. Momentum Characteristics
1. Overbought/oversold
2. Divergences

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

62. . . . but momentum often turns ahead of the price.

63. C B A
Negative divergence

65. Everything looks good!!

66. Weak momentum is warning of trouble ahead Momentum
Price
Weak momentum is warning of trouble ahead
Momentum

67. Divergences must be confirmed by the price.

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

69. Weak momentum finally confirmed by price

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

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

73. A B
Positive divergence

74. Sugar
Confirmation
Positive divergence
10-day ROC

75. Coca-Cola
RSI 14

76. Virtually no upside momentum at final peak

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

78. Virtually no downside momentum at final low

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

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

81. Japan ETF (EWJ)
ROC (14)

82. Momentum Characteristics
1. Overbought/oversold
2. Divergences
3. Characteristics in bull and bear markets

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

84. Keycorp
Earnings up
Price down
Earnings
Earnings up

85. Keycorp
Earnings up
Price down
Earnings
Earnings up

86. Price sideways to down
Ebay
Earnings Up
Ebay Earnings

87. 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.

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

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

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

91. Primary bear market lasts 1 to 2 years
Primary bull market lasts 1 to 2 years

92. . . . means that the price will very likely rally.
Oversold in a bull market . . .

93. . . . probably means the top of the rally.
Overbought in a bear market . . .

94. Followed by a trading range
Overbought in a bull market

95. Oversold in a bear market
Followed by a trading range
Oversold in a bear market

96. Doesn’t necessarily result in much of a rally
Oversold in a bear market

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

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

99. S&P ETF (SPY)
RSI(14)

100. Two Broad Ways of Interpreting Momentum
1. Momentum characteristics
2. Identifying momentum trend reversals

101. Techniques 1. Trendlines 2. Price Patterns 3. Moving Averages

102. Techniques
1. Trendlines

103. Momentum must be confirmed by price

104. Momentum must be confirmed by price.

105. Gold Trust ETF (GLD)
ROC (30)

106. CDN $ (Weekly)
39-week ROC

107. China ETF (FXI)
RSI (14)

108. S&P ETF (SPY)
RSI (14)

109. S&P Composite
12-month RSI

110. Techniques
1. Trendlines
2. Price Patterns

111. Confirmation
Rectangle

112. Head and shoulders
Head and shoulders
Confirmation S H

113. S H
Coca-Cola
Confirmed 6 weeks later S H
RSI 14

114. Google
ROC (45)

115. Procter & Gamble
RSI (14)

116. Caterpillar S H
14-day RSI S H

117. Warning: Breakout is coming from an overbought level
Whipsaw S H
Warning: Breakout is coming from an overbought level S H

118. Higher highs
Comcast
Overbought
Lower highs
10-day ROC

119. Techniques 1. Trendlines 2. Price Patterns 3. Moving Averages

120. Smoothing of raw data

121. Bad sell signal

122. MA of MA

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

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

125. Straits Times
Smoothed RSI
(8/9)

126. Google
MACD

127. China ETF (FXI)
Dallas Cowboys

128. The End

129. The Special K

130. 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

131. 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

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

133. CRB Composite
Special K

134. CRB Composite
Special K