Tuesday, February 14, 2006

Strong Upward Momentum: What Follows

Readers of the Trading Psychology Weblog are familiar with the Demand/Supply measure, which is a proprietary indicator of momentum that I post daily to the site. Demand is the number of listed U.S. operating company stocks that closed above the volatility envelope surrounding both a short-term moving average and an intermediate-term average. These, therefore, are stocks with very strong price momentum. Supply is the number of issues that close below both averages. It is common for Demand and Supply to hit extremes prior to price peaks and valleys in the major averages.

Since the start of the bull market (N = 729), we have had 44 days in which the Demand reading has exceeded 120. (Tuesday's reading was over 130, reflecting the solid rally; please note that these are normalized values, not raw figures). Three days after such strong momentum, the market was up by an average of .52% (33 up, 11 down). This is much stronger than the average three day gain of .18% (432 up, 297 down) for the sample overall. Strong upside momentum tends to persist in the short run: this finding has been valid throughout the bull market.

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