The Ultimate Day Trader by Jacob Bernstein

Author:Jacob Bernstein [Bernstein, Jacob]
Language: eng
Format: epub
ISBN: 9781440513954
Publisher: Adams Business
Published: 2009-07-15T00:00:00+00:00

Figure 9.4. Price and Momentum declining in unison, Ariba Inc. stock, weekly bars. This is a normal pattern.

Figure 9.5. Price and Momentum declining in unison, JDS Uniphase stock, weekly bars. This is a normal pattern.

Figures 9.4 and 9.5 show the ideal relationship between declining prices and Momentum becoming more negative.

Remember that Momentum can fall below zero. Zero is not a stopping point for Momentum. The lower Momentum goes the lower price goes.

Furthermore, as Momentum becomes more negative, prices are likely to continue lower. Declining Momentum with price moving sideways or higher is a bearish indication since Momentum tends to lead price down as well as up (see the previous section).

It should be noted at this point that there is a logical stopping point for declining Momentum. Prices have a downside limit. The lowest price that a market can go to is zero. Naturally Momentum will eventually stop declining when the market price goes to zero. Unless a company is going bankrupt and is being de-listed from trading, there is a good possibility that as the price of a stock approaches zero (or as a commodity price gets very low) Momentum will begin to level off and turn higher. Many excellent buying opportunities in stocks and commodities develop when this occurs—more about this situation in a later chapter.

NORMAL PATTERNS: MOMENTUM AND MACD

Normal patterns are further demonstrated by looking at both the Momentum and MACD indicators in tandem. The next two charts (figures 9.6 and 9.7) show normal patterns exhibited with both Momentum and MACD.

Both of these charts show normal price and indicator patterns. They can be traded based on the idea that a move in a particular direction may be strengthening or weakening. But when price and one or both indicators diverge, that condition can signal even greater trading opportunities.

BULLISH DIVERGENCE: PRICES MOVE LOWER

AS MOMENTUM MOVES HIGHER

When price and Momentum diverge from one another, or go in opposite directions, it represents a very important trading condition. If Momentum leads price and if Momentum begins to rise while price is moving down then it’s a reasonable assumption that at some point in the future the price will move up.

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