How To Use TM’s Indicators: The Proprietary Momentum Lists
“An object at rest tends to stay at rest and
an object in motion tends to stay in motion with the same speed and in the same
direction unless acted upon by an unbalanced force”
— Sir
Isaac Newton’s first law of motion
I am sure that Sir Isaac Newton was not pondering the movement of stock prices
when he discovered his laws of motion in the late 1600s, but they are not
immune to his discovery. A stock in motion will tend to stay in motion for the
short term, until acted upon by the unbalanced force of profit-taking. This is
not a gigantic revelation to momentum traders with years of experience, but how
does the novice — or one looking to ratchet down their trading time frame into a
shorter period of exposure — begin to take advantage of the “physics”
of stock movement? One of the easiest ways to get a head start on the next
trading day is to go to the TradingMarkets.com
indicator page and add the names that appear nightly on the Proprietary
Momentum List and Proprietary
Implosion List to your watchlist. These are the strongest and weakest stocks
in our database as measured by TradingMarkets.com’s proprietary relative strength
model and are designed to alert you to where the hottest stocks are, based on
recent market action, to the long and short side.
How to take advantage of the Momentum/Implosion
Lists
The mantra of these lists is momentum begets momentum. The primary strategy
for these stocks is to look for continuation when the stock trades above the
previous day’s high. This is the simplest entry, and by waiting for follow-through,
you protect yourself from getting into the stock after the momentum has been
halted.
Land’s End
(
LE |
Quote |
Chart |
News |
PowerRating) appears on the PML on the evenings of both Nov.
23 (red oval) and 26. As you can see in the chart
above, a simple trade-though
entry above the prior day’s high would have yielded a profit of more than 1
point on the 26th and nearly 2 points on the 27th.
Electronic Data Systems
(
EDS |
Quote |
Chart |
News |
PowerRating) is another issue from
the PML on the night of Nov. 26. The momentum spills over into the following
session for a more than 2 point gain intraday.
Using the Momentum and Implosion lists
with intraday patterns
After getting trade-through entry in one of these momentum or
implosion candidates, you can further reduce your risk by placing an initial
protective stop and monitoring the action on an intraday basis. This way you
can protect profits in the event the stock’s movement is in a profitable
direction, or keep your losses small in the case of a whipsaw reversal. The best
way to time your entry using the intraday chart is by utilizing intraday
pullbacks and breakouts from consolidations.
Shire Pharmaceuticals
(
SHPGY |
Quote |
Chart |
News |
PowerRating) shows up on the PIL Nov. 23.
The following day we get follow though beneath the previous low.
SHPGY continues its downtrend and breaks down to a new low.
Traders going short on the breakdown from a very narrow Slim Jim are able to
ride the stock nearly 1 1/2 points lower.
DST Systems
(
DST |
Quote |
Chart |
News |
PowerRating) comes up on the PML list on Nov.
26.
DST provides a solid 1 point profit when it trades above the
prior high. However, observant speculators that notice the market rebound on the
27th are able to take advantage of an earlier Slim Jim breakout and reap the
reward from a solid move from a stock that is pretty conservative on an intraday
basis.
How long will it last?
Ay, there’s the rub. Momentum will continue until acted upon
by the unbalanced force (sellers), but we don’t know when that is going to
happen. The short-term trend could last for as little as a few minutes to as
long as a few days. Lessening your exposure by going home flat at the end of
every trading session will be of great benefit to both you and your equity
curve, but in certain circumstances, you can maximize gains by holding overnight
and exiting the following day either on the open, if the stock fizzles, or later
on after it exhibits further momentum. This approach is not without risk and to
hold overnight is a decision that you need to make according to your own
strategies and risk parameters. Let me add the caveat that this strategy should
only be utilized in the strongest (reverse for short positions) markets and
strongest cycles of that market. However, by stalking these issues for upward
and downward momentum and proper money management of your trades, you will save
yourself a great deal of time and effort in addition to increasing your
likelihood of finding some winners during the trading day.