In order to understand momentum you must under stand what caused it. We’ve talked about news, and divergences. Many people trade the news. Technical traders do it too but by understanding how the market sets up, prior to the public delivery of the news.
Public delivery? If you had the resources of the MM’s, what could you do? Mind you, the retail traders are a small percentage of the trading population. The truly large MM’s have massive staff. One celebrated hedge funder hires many talented mathematicians to calculate probabilities. Would it behoove these large MM’s to invest time and money to understand the sectors they have interests in? Use your mind to extrapolate from there, to the extent of how they would wisely use their resources. As for reports and federal changes. Do reports of over 100 pages suddenly and be so easily interpreted the moment it is released? Many reports are actually sent out 2 weeks in advance to those who require them. Do you really think that the feds would do anything without discussing their proposed changes to those most affected? Ever heard of lobbyists? Google has their own lobbying machines. Would the fins also? You know those industry news that covers specific industries, they can come up with their niche market’s share and can guess how well companies are doing and knowing who got what contract and who didn’t. News is therefore late.
Ever noticed at earnings, the stock that is about to release their earnings, experiences a rise in price. People and news buzz with excitement. People go long on the stock driving up the price. Earnings released it was great and wonderful but something fundamentally was wrong. Sell off. You should have noticed the negative divergences. MM’s were selling systematically. What do people say after that. The response was already baked in. People knew in advance.
Its market manipulation!! If it were market manipulation, should you have the means to detect it? If it is being manipulated, would charts be any use at all? The data would be lacking and unreliable. For your information, there are interests to hide transactions so the charts wont reflect them. Who’s lobbying for that I wonder? But the charts truly reflect the market. It isn’t lacking or unreliable. So many people work so hard to link news to extremes that everything becomes a government conspiracy to them. Most of these people are bitter angry people. And the sad thing is, they don’t even have their facts straight.
It is like the Made In America campaign vs Globalization and Free Trade. The real reason Free Trade makes sense is that we’ve become a highly developed technological nation. And due to our labor unions, cost of production is too high to compete with the emerging markets. Free Enterprise is about buying cheap and selling high. That’s the American way! So what is the natural progression? Move the production to 3rd world countries and take advantage of the cheaper labor. Build up their economies and then gain market share over there. Ergo, more jobs for us. Not labor jobs. But technology, management, support and infrastructure. Why? Its what the hard working Americans dreamed for their children. The reason they paid for their college education. The shift is from manual labor to using our minds. Its called progress.
The point is, people are being misinformed. Politicians make it hard to believe anyone because they are a bunch of turncoats themselves. Who’s fault was it that caused the problems? Was it Obama? Or was it of years of policies the senate and congress passed prior to Obama. How is it that these guys are now suddenly experts on economic policies and yet through their tenure, they didn’t see this coming? Some are pretending badly. What are they focusing the blame on? Not on those policies they passed but how Obama and company has chose to address them. Its a voting year people. There is meaning in their madness. Who has a longer tenure? Presidents or Senate and Congress? Who will lobbyist talk to more? Lets get back to the task at hand.
Enter the Divergence
Why do complex chart patterns form? Double tops, double bottoms, head and shoulders and inverse head and shoulders? All about divergences.
Distribution patterns happen because on the lower timeframe, you have declining bullish momentum. In the higher timeframe, it has not experienced this decline of bullish momentum, because it was heavily bullish, and so as the shorter timeframe continues to lose bullish momentum, the higher timeframe’s bullishness pushes the price higher and you get negative divergence in the shorter timeframe. The shorter timeframe maintains its decline in bullish momentum , finally causing the higher timeframe to weaken. Bam!! Price pops up forming a double top. Price goes down hard. O but wait the higher timeframe’s next adjacent higher timeframe is still a bit bullish. Bam! A head and shoulders formation. And then finally all of them are weak. Market tanks.
Which of these 2 charts is showing a more pronounce negative divergence? How long did it take the weekly to reflect the sustained events in the daily?
Obama took office Jan 09. Since then the market skyrocketed from its lows. And last 2 weeks we’ve seen a draw down. Is it back to previous lows? Not even close. People for months have been saying the market is moving sideways. Its the policies!! Who cares! Trade what you have before you! Don’t engage in funnymentals. You’ll just get angry, especially when you hear these “expert” opinions in the chat rooms.
A correction was due. We were oversold. The momentum down was built up due to the distribution that started back in June-July09. You get a little pull back and all of the sudden Obama and company are crooks.
2 words. GET REAL!
Momentum moves when you finally have all your timeframes working in the same direction. When the offsetting of the bullish and or bearish volume surpasses the other. This is true in all timeframes. Why do the longer timeframes have to participate? Because the longer timeframes are the truer representation of the market status.
Can it be made to move the other way and avoid the completion of the pattern?
Yes. To divert a distribution pattern, you must set up an accumulation and have sustained bullish move upward to change the dynamics of the longer term. Detectable? Yes! Absolutely.
Putting it all together
- The longer term trend rules.
- The shorter term trend can show you the trend changes early.
- If the shorter term trend is sustained and strengthens, it will affect the longer term trend.
- Complex chart patterns form due to the offsetting of bullish and bearish volumes between short and long term timeframes.
- When timeframes are inline with each other in direction, you get moderate-strong moves
- News happens, but release is usually late – reaction to news is set up prior to release. The release of news accelerates the outcome.
Its all about the price action
In another point of view, without noting divergences in the oscillators. You can detect the these divergences by just looking at your candles. You may notice your candles trading sideways and forming distribution or accumulation patterns but on your higher timeframes, the candles are not even going sideways yet. They are still moving based on the accumulation and distribution they affected in the higher timeframes. Therefore what you are noticing in your lower timeframes is the weakening or pause of momentum. Until you have the longer timeframe moving in the same direction of the shorter timeframes you will not see the momentum in the opposite direction. What do you need to see? Longer timeframe candles move sideways to reflect the accumulation and distribution patterns of the lower timeframes. Basic and logical.
The mechanics of this price draw down we are experiencing is really mechanical. It is a process that occurs everyday with or without the news. It is an exhaustion of resources. Any chart patterns that you see in the daily occurs in the tick and in the monthly yearly charts. What ever timeframe you choose they occur exactly the same. The offsetting of bullish and bearish momentum can sometimes be short or extended. Some move quickly some may take years to develop.
Get rid of the emotional trading that can cause you to over analyze the market. Stay technical. Fundamentals and news has its place. But when you are getting into a trade, decide based on the charts.
Momentum is gained when the accumulation or distribution of 2 or more adjacent timeframes are inline with each other, producing a strong move up or down respectively. The more timeframes working in the same direction, the stronger the move. The result could be the formation of 1 candle or the finalization of a large chart pattern. It all depends where you are playing your trade.
Go listen to some baroque music. Breath deeply and engage in thought. Much better than going ba-roke because you listened to some funnymental conspiracy. Think for your-self and read the charts!