l Introduction

-Definition

-Construction

-Characteristics

lAnalysis

lVolumeStudies

l TypesofMomentumIndicators

lConclusion

Lecture5Objectives

ReadingMaster Textbook

TechnicalAnalysis:TheCompleteResourceforFinancialMarketTechniciansCharles D. Kirkpatrick and Julie R. Dahlquist

Chapters18;pp.409-451

Additional ReadingHowTechnicalAnalysisWorksKamich, Bruce,chapters14-16

College level IntroduCtIon to teChnICal

analysIs

This lecture series is produced by the Market Technicians Association

Educational Foundation, Inc. Copyright © 2007. All rights are reserved.

MoMentuM IndICators

M a r k e t t e c h n i c i a n s a s s o c i at i o ne d u c at i o n a lF o u n d a t i o n

Identifying and funding educational programs in the field of Technical Analysis since 1993

Mta educational FoundationPost Office Box 425127

Cambridge, MA 02142-5127617/253-8959 • Fax: 617/452-2199info@mtaef.org • www.mtaef.org

Momentum Indicators • Lecture 5, page 2College Level Introduction to Technical Analysis

Volume [Chapter 18, Page 412]

• General

– Amount of shares or contracts traded over the period of the bar

• Portrayed as a vertical bar below the price bar (Chart 1)

– Standard guides

• Volume should go with the trend

• Volume not going with the trend is a warning of impending trend reversal

• Exceptionally high volume is a signal of an important change.

• Volume is a secondary indicator – never should supplant price analysis

• Indexes – used for divergence analysis [Chapter 18, Page 417]

– OBV – uses guide above as its logical base. Index of plus or minus volume day based on change of close. (Chart 2)

– Other calculations with very similar results

• Oscillators – used for divergence analysis and overbought/oversold indicator (Chart 3)

– Volume Oscillator – simplest. Ratio of two moving averages of volume. Should confirm the price trend (divergence analysis) (Chart 4 and 5) [Chapter 18, Page 422]

– Others show about the same information

• Spikes (Chart 6)

– Usually a sign of a strong support or resistance level or a sudden change in information (gap) or action (breakout).

Open Interest [Chapter 18, Page 431]

• Expanding should confirm the trend, just as in volume.

• Table: Open Interest

Price [Chapter 18, Page 433]

• General

– Momentum – first and second derivative – velocity = price change per time, momentum = acceleration/deceleration (without mass) of velicity)

– Oscillators used as signals are not very profitable. Should only be used as confirmation – trend, OB/OS, divergence

• Types

– MACD – difference of two exponential moving averages. Signal line is moving average of difference. Histogram plots difference between MACD line and signal line. (Chart 7)

• Signals on crossovers

• Signals on change in direction of histogram lines

• Divergences

• Swing failures

Sell long Sell ShoRT

Buy long Remainsthesame Plusopeninterest

Buy to cover Minusopeninterest Remainsthesame

Chart 1Price and Volume

Chart 2On-Balance Volume

Chart 3Chaiken Accumulation Distribution

Chart 4Volume Oscillator

Momentum Indicators • Lecture 5, page 3College Level Introduction to Technical Analysis

• Rate of Change (Chart 8) [Chapter 18, Page 437]

• rsi (Chart 9) – relative strength index – current action relative to action in the past.

– Measures the number and amount of up bars versus down bars

– Bounded by 0 and 100

– signals

• OB/OS – be careful of trending stock

– Divergences

– Swing failures

– Trend lines, patterns (usually triangles)

• Stochastic – (Chart 10) measure current price versus defined past window of prices – best in trading range. [Chapter 18, Page 442]

– Signals the same as for other oscillators

– Similarities (Chart 11)

• combinations

– ADX for trend

– oscillator

– Moving average

Chart 5Chaiken Money Flow

Chart 6Volume Spikes

Chart 7Moving Average Convergence-Divergence (MACD)

Chart 8Rate of Change (ROC)

Momentum Indicators • Lecture 5, page 4College Level Introduction to Technical Analysis

Chart 9Relative Strength Index (RSI)

Chart 11MACD and RSI

Chart 10Stochastic