HOME  |   OUR MISSION  |   SERVICES  |   CONTACT US 05/16/08
Send this link to a friend 
DAILY/WEEKLY

HISTORICAL GL's


TUTORIALS
BASICS
FUNDAMENTALS
TECHNICALS
ROLLING
TC-2000
OPTIONS


Greetings, fellow Pro-fundity team members -
10-22-99 Page

    This Week's Guidepost

  1. In recent Guideposts we have studied the contrarian investment strategy. The basis of this approach is to be where the crowd isn’t. Identifying where the crowd is, through proxies for crowd sentiment, enables the contrarian to take advantage of predictive market forces and movements. Thus the contrary moniker. This has proven to be a sound investment vehicle in many cases, particularly in longer term trading scenarios (three years is a common time frame for the contrarian investor). However, using our rolling stock strategies, where we expect a stock price trend to turn in 3 weeks to 3 months, the contrarian approach is not a strong asset.

  2. The opposite of the contrarian is one who relies on crowd psychology and crowd behavior as a trading vehicle. This is termed momentum investing, utilizing Newton’s second law of motion which states that a body in motion tends to remain in motion unless acted upon by some external force. Or, a price trend in place will tend to stay in place until some market action forces a change. The nature of market sentiment becomes a tool for the momentum investor. As investor confidence waxes and wanes, the price responds with changes in the price trend, increasing, decreasing, or changing direction.

  3. Definitions:

    Price trend: The constant movement of the price of a stock through a period of time. A price trend may be short, intermediate, or long term. Trend lines can be drawn on a chart indicating the direction the price has been moving. This may indicate the direction the price will continue to move. It becomes the task of the chart analyst to assess the likelihood that a trend will continue. Or, determine when a trend reversal is imminent or actually in progress. When a stock price breaks through a trendline, a new trend beginning is indicated.

    Momentum: A measure of the velocity of a price move. Momentum is a generic term, measured by a variety of indicators. The measure of momentum in a stock price is the purpose of technical analysis. Individual indicators which we have covered in past Guideposts include the stochastics, relative strength indicator (RSI), and the moving average convergence divergence (MACD). Each indicator brings its own view of the price pattern, but they are interpreted in much the same way.

  • Because momentum depends on investor psychology, its indicators will cycle from high to low, as emotions swing from greed to fear. Because of this, all momentum indicators oscillate. That is why they are termed “oscillators.” Momentum indicators and oscillators refer to the same phenomena and can be used interchangeably.

  • In all freely traded markets, stock value is determined more by the attitude of investors than by the stock fundamentals themselves. Thus, price trends are driven primarily by psychological forces. It is the reality of emotional behavior, jumping between extremes, that causes the momentum indicators to cycle.

  • Two new terms are used to describe these two extremes:

    1. Overbought: Relating to a stock price that has risen very rapidly in the recent past and is likely to suffer short-term price declines (corrections) in the near future.
    2. Oversold: Relating to a stock price that has declined rapidly and steeply in the recent past and is likely to exhibit short-term price increases in the near future.

  • As the price of a stock fluctuates between overbought and oversold extremes, the momentum is reflecting crowd psychology and measures the intensity of investor attitudes.

  • Technical analysis is used to identify trend reversals at an early stage providing an advantage to investors. To do this, we must rely on momentum indicators. We have covered what we view are important in our technical analysis section in our new book, The Provident Investor. These indicators work well in most time frames studied, however none of them works perfectly all the time. It is important for us to utilize several chosen indicators, looking for consensus. Our odds of success increase with the number of indicators sending the same message.

  • We utilize technical analysis to identify trend reversals as early as possible. Once identified, we attach ourselves to the new trend until it reverses. We assume the new trend will remain in force until new evidence proves different. One oscillator signaling a reversal by itself is not sufficient. We need consensus from more than one to flag a reversal.

  • We will pursue an analysis of momentum investing in this space during coming weeks. Stay tuned.

    • Understanding:

  • It is our intent to help our subscribers understand market strategies well enough to make informed decisions and understand the risks.

    • We provide TC-2000 tutorials to members. See the Member Login page.

    Be diligent...

    Take action!







    COPYRIGHT © 1998-2006 by Pro-fundity (sm). All Rights Reserved. No part of this work may be used or reproduced in any manner whatsoever without the written permission of Pro-fundity(sm). Pro-fundity(sm) is an independent research firm producing research reports based on many sources believed to be reliable. No guarantees are made as to the accuracy and completeness of the information. The information in this report does not constitute an offer nor solicitation to buy or sell securities. Information obtained via the use of this site should be coupled with the individual's personal due diligence in researching individual securities BEFORE purchase and the individual is advised to contact their broker or financial advisor before making any investment decision.

    Linked sites on the Pro-fundity web site, that are not under the control of Pro-fundity, are provided as a convenience only. The inclusion of a link does not imply endorsement of the linked site or its content by Pro-fundity.