A DJIA Long-Term Momentum Indicator by Jay Kaeppel
Picking the tops and bottoms of the market has always been the dream of traders. Is it necessary, though? Here are the results of using a long-term momentum indicator based on the Dow Jones Industrial Average (DJIA).
With powerful personal computers and abundant price data now commonly available, many stock market professionals - and even nonprofessionals - are focusing more and more on capturing profits from short-term trading. With many new traders in particular, the goal seems to be anticipating and pinpointing market tops or bottoms. For them, it appears that nothing less will do. The problem with this approach is that it assumes that picking tops and bottoms is necessary to make a profit. More to the point, this approach assumes that picking exact tops and bottoms is even possible.
When looking for an entry point to buy stocks, the most useful question is not "Are we at the bottom?" but rather, "What is the probability of the market rising from current levels?" Investors may fare better by focusing more on current trends and the likelihood of a major advance and focusing less on trying to pick those elusive turning points.