Momentum Indicators and Market Cycles
by John Nicholas
The techniques used for stock and commodity analysis range from the naively simple to the stunningly
complex. Some are based on sound mathematical and philosophical principles while others border on
witchcraft. This article discusses one major indicator and how it relates to price movement.
We often hear the markets described as "overbought" or "oversold". Usually "oscillators" are used to help
define these conditions. These same "oscillators" were called "momentum" by Larry Williams. In
statistics, they are termed "moving percentages", "rate-of-change", or "differencing". All of these terms
refer to basically the same mathematical procedure. We will use the term "differencing" for the remainder
of the article.
As the name implies, differencing involves subtraction, specifically the subtraction of a price some
number of days in the past from the most recent price. If each day we were to subtract the closing price of
some commodity ten days in the past from today's price we would be differencing over a ten day interval.
The number we would calculate would be both positive and negative and would tend to move from one
extreme, through zero, and the other extreme, up and down in a rather regular pattern. The interval that is
used in differencing is very important. In order to illustrate how the length of the interval effects the
behavior of this indicator, we'll apply various intervals of differencing to one data set.