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
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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