Price vs Momentum
Mainly because price is traded not momentum, price has a direct connect with information and because momentum is derived from price
Two of the most important variables in understanding a market trend are price and momentum. Price has always got more attention vs. momentum. Mainly because price is traded not momentum, price has a direct connect with information and because momentum is derived from price. So, how can something secondary become more important than what it is derived from? This is what the ‘school of price’ believes. There is no ‘school of momentum’. Are we missing something here?
Momentum has multiple purposes. One key objective is to understand what the price is not telling us. What is the price not telling us? Price does not tell us multi-month or multi-year seasonality as well as momentum. Seasonal variation is defined as the repetitive and predictable movement around the trend line. Irrespective of what the short term information dictates, larger seasonality continues to influence prices. Momentum indicates such seasonality, which is inherent in the price but not depicted by it.
What is right, what is wrong? It’s hard to answer this question whether price is correct or momentum, but as we go from measuring a shorter term perspective to a longer one, price starts to fail while momentum perspective strengthens. The reason is that larger time frames have few but distinct seasonality and fewer the seasonalities (cycles) higher their workability.
In this latest update we have looked at Price vs. MACD momentum (a popular momentum indicator among cyclists). As technicians, we are taught that price confirmation is key. However, price confirmation may not be always clear and unambiguous, especially looking at larger timeframes. Say, for example, if we draw a channel on the Dow 30 from 1930, we can see the index struggling at two resistance levels. One is the historical all-time high resistance and the other is the channel resistance, as the prices are testing channel highs. Now, these are key resistances suggesting that prices have a daunting task moving ahead. Now, this is the price view.
Let’s look at MACD momentum now. Momentum is the rate of acceleration of a security’s price and primarily indicates the direction of price movement. Dow 30’s quarterly MACD momentum has turned up from the zero line and is accelerating up. If or when this momentum breaks the illustrated trendline resistance, it will be a clear sign that momentum has turned positive for the global benchmark. When that happens, prices should confirm positivity and break above the price resistances. Now, the question here is what will prevail, momentum positivity or price negativity?
A similar interpretation or contest can be seen between price and momentum of various other global indices. Here we have illustrated price and momentum for the Indian Sensex. Sensex is testing a decade long trendline support. Conventional price wisdom may suggest that a break here would be negative. However, if we look at it closely, the Sensex price structure is a sideways structure since November 2010. This is not a classic distribution and looks more like a consolidation structure.
Moreover, if markets are distributing they fall, they don’t move sideways. Markets have a mind of their own and unlike investor emotion, markets are not fickle minded, they are either consolidating (positive) or distributing (negative). If markets are consolidating they don’t just change their mind and decide to fall.
Now, that was a price structure analysis, which of course lacks a price confirmation (the prices are still above the trendline support). Even if all our above analysis is wrong and the Sensex or the Dow are getting ready to fall (beyond September-November annually weak period) we need a negative price confirmation (Sensex and Dow are still positive for the year).
Sensex momentum on the other hand is back at zero levels, which suggests that seasonally a lot of negative time is over for the Sensex. Sectorally speaking, all of CNXIT, NSEBank, BSE Health and BSE Oil have confirming positivity on momentum and price. While BSEAuto and BSERealty have non-confirming momentum and price. This suggests that auto and realty could underperform the rest of the market.
There is a similar momentum and price conflict on the dollar index and gold. The very fact that the two assets are connected makes the interpretation harder. Let’s see how things resolve on the dollar and gold and what prevails, momentum or price.
The author is CMT, and Co-Founder, Orpheus CAPITALS,, a global alternative research firm.