By Chris Diodato – TradersBase.com
While working on my analyst license, one of the concepts that always stuck with me was that one can use patterns in indicators, such as the RSI, to project market movements. This method of analysis was pioneered by Martin Pring, who wrote several books on trading.
Here is what I am seeing on the S & P 500. For this study, I’m using the S & P ETF, symbol SPY.
Using traditional analysis, we can see an obvious descending triangle, or perhaps head and shoulders breakdown in the lower momentum indicator. If I project a target, it gives us a momentum value of -8.6. What does that mean?
What is momentum?
Very often, traders find themselves using indicators that they don’t even understand. They work, and that’s the most important thing to know. Before finding out what a momentum reading of -8.6 means for the S & P. Take a look at this short video to understand what “momentum” actually is.
So now, what does a momentum target of -8.6 mean? That means that with my 12 day momentum as the width, I need to solve for the rise.
Once again, what does that mean? It means that if we have 12 days in a row, with a total decline of 103.2 points on the S & P 500 (using the ETF complicates things), we will reach our minimum momentum target. That is not an prediction of what will happen though. For instance, if the market declines over 200 S & P points in six days, the momentum reading will surely break past our target. What a trader should essentially glean from this is that at this point, a decline of over 100 S & P points is imminent.