Momentum Indicators

Relative Strength: The relative strength of a stock is the ratio of its current price to its average over a longer period (eg. six months). The rule suggests buying stocks which have the highest relative strength (which will also be the stocks that have gone up the most in that period).

Trend Lines: You look past the day-to-day movements in stock prices at the underlying long-term trends. The simplest measure of trend is a trend line.

Following the Smart Investors: The Followers

This approach is the flip side of the contrarian approach. Instead of assuming that investors, on average, are likely to be be wrong, you assume that they are right.

To make this assumption more palatable, you do not look at all investors but only at the smartest investors, who presumably know more than the rest of us.

Insider Buying and Selling

You can look up stocks where insider buying or selling has increased the most.

The ratio of insider buying to selling is often tracked for stocks with the idea that insiders who are buying must have positive information about a stock whereas insiders who are selling are likely to have negative information.

Specialist Short Sales

The assumption is that specialists have more information about future price movements than other investors. Consequently, when they sell short, they must know that the stock is overvalued.

Investors who use this indicator will often sell stocks when specialists do, and buy when they do.

Markets are controlled by external forces: The Mystics

The Elliot Wave: Elliot's theory is that the market moves in waves of various sizes, from those encompassing only individual trades to those lasting centuries, perhaps longer. "By classifying these waves and counting the various classifications it is possible to determine the relative positions of the market at all times". "There can be no bull of bear markets of one, seven or nine waves, for example.

The Dow Theory:" The market is always considered as having three movements, all going at the same time. The first is the narrow movement (daily fluctuations) from day to day. The second is the short swing (secondary movements) running from two weeks to a month and the third is the main movement (primary trends) covering at least four years in its duration.

 

Prof. Aswath Damodaran

Next: Determinants of Success at Technical Analysis

Summary: Index