Momentum And The S&P 500
by Michael Oliver and Gary Esayian
As applied to market action, momentum is generally confined to some limited role such as measuring the
relationship between moving averages. But momentum can be much more. Michael Oliver and Gary
Momentum, the relative change in price over a specified time, can be used as a methodology of sorts
for market analysis. Momentum provides a measure of insight that goes far beyond simple price
confirmation. Price can be considered to be the veneer of a market, the side that is clearly visible to the
public. Beneath the surface of a market, however, is the internal structure of market action — the
structure of momentum. Major shifts in price (whether those moves constitute trend reversals or
resumption of the previous trends after consolidation) are first announced in momentum structure or a
market's momentum dynamics. Momentum analysis seeks to evaluate market price by measuring
momentum. A measurable momentum slowdown indicates that a market reversal is possible because the
market players involved are beginning to have doubts. But momentum maintenance or acceleration
evinces that the present trend can be sustained.
The study of momentum should not be seen as being primarily a trading "system"; rather, it is a
systematic approach to understanding price action. Momentum analysis can be used for asset
management or as an adjunct to other forms of asset management. As a supplement, it is particularly
effective at tightening performance and reducing risk. It can be applied to commodities as well as equities.
THE VENEER OF PRICE
Are the technical indicators we see so often — indicators such as head and shoulder patterns, rectangular
and trendline breakouts, moving average juxtapositions, to name only a few — foolproof? Of course not;
nothing ever is. How, then, does an asset manager or trader know or intuit when he is stepping into a
losing situation? It is impossible to say. Thus, momentum can steer the black box trader as well as the pattern trader toward prudent, profitable behavior.