Momentum in Charts

13 November 2023 By PDSNET

When you throw a tennis ball high into the air, before it reaches its highest point, it begins to slow down – it loses upward momentum. The same principle applies in the progress of a chart.

When a new upward cycle commences, it usually comes after a protracted downward trend and initially there may be considerable buying energy. That energy manifests in the form of break-away gaps  where the opening price of one day is noticeably above the previous day’s high creating a gap in the chart. The number and size of the gaps is an indication of how much buying enthusiasm remains in the market.

Of course, as the chart moves higher, there is less and less incentive to buy and more and more incentive to sell. After a time, as the bullish and bearish sentiment come more into balance, the gaps disappear and the rate at which the chart is climbing begins to slow noticeably. In other words, it loses upward momentum. This is usually a sign that the cycle is nearing its end.

The trend flattens out and then turns down, but if you are alert and notice declining momentum you can generally anticipate the downturn before it arrives. Indeed, momentum is the only technical indicator that can give an early warning of the top of a cycle.

Consider the following chart of the S&P500 index from Wall Street over the past four months:

S&P500 Index: 7th July 2023 - 10th November 2023. Chart by ShareFriend Pro.

The chart shows the anatomy of the downtrend so far and highlights the exhaustion gaps and break-away gaps. An exhaustion gap is the opposite of a break-away gap and occurs when bullish investors disappear completely and the chart gaps down to a new low level.

The chart also shows the place at the top of the recent cycle where the S&P lost momentum. You can see clearly how the upward trend slowed down between 10th and 17th October (horizontal red line) – a clear indication of the coming downward trend.

One of the primary drivers of the current upward move on Wall Street has been the strong performance of Microsoft (MSFT). This company has a market capitalization of almost $3 trillion and accounts for about 2,5% of the S&P500 index, making it the most valuable company on Wall Street. Last week alone it rose 7% on the back of its increasingly dominant position in the development of artificial intelligence (AI). The share gained strongly following the release of its first-quarter earnings reported on 24th October 2023 which was ahead of estimates on the top and bottom lines and posted strong growth in its Azure cloud infrastructure division. It outperformed other cloud and AI competitors like Alphabet and Amazon.

Microsoft and other tech companies drove the 1,56% jump in the S&P last Friday. AI is expected to improve the profitability, not just of tech companies but of all companies as they implement this new efficiency and gain productivity as a result.


DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.



Share this article:

PDSNET ARTICLES

Correction

The progress of the S&P500 index of the 500 largest companies on Wall Street is important because stock markets around the world, including the JSE, tend to follow it sooner or later.

On 19th January this year, something momentous happened when the S&P broke above its previous all-time record high

WeBuyCars

In a few days’ time, Transaction Capital (TCP) will unbundle and separately list its second-hand car sales company, WeBuyCars (WBC). The main benefit of this is to release the value of WBC into the hands of its shareholders. When the listing is complete, on 11th April 2024, WBC will have a total of 417,2m shares in issue which are expected to

Gold and Harmony

In our last Confidential Report, published on 6th March 2024, we drew your attention to the fact that the US dollar price of gold was about to break up through a critical resistance level at $2060. Gold has now moved up to $2166 so this observation provided an opportunity for private investors to make a significant capital gain, either in actual gold

Reverse Takeover

At the end of October 2023, Mix Telematics (MIX) was a relatively small fleet management company with a market capitalisation of just R2,3bn listed on both the JSE and the American NASDAQ. Its shares on the JSE were wallowing at a low of 380c. This compares with its competitor, Karoo (KRO), also listed on the JSE, but which was at the time, more

Rare Opportunity

You may not have been aware of it, but last week, between Monday and Friday, there was an opportunity to make an 80% profit on your capital. This opportunity occurred because of insider trading on a little known and traded share called Quantum Foods (QFH) in the poultry and animal feeds business.

Generally, the poultry business is

Excessive Bullishness

On Friday last week, the S&P500 index posted yet another new record closing high, but this time just one point higher than the previous day at 5088. This means that the index, which measures the progress of the 500 largest companies on Wall Street, has been climbing without a significant correction for nearly four months. Consider the chart:

Lessons from Transcap

As a private investor it is very important that you study what has happened in the past and learn from it. The progress of Transaction Capital (TCP) has provided us with an excellent opportunity to examine and learn from a complete cycle in an institutional favourite share. We can examine the entire cycle and see how to profit from it. In this regard, it is important

Sasol

Sasol is a company originally established in September 1950 by the National Party, to counter the possibility of petrochemical sanctions against the old South Africa. Essentially, Sasol used South Africa’s enormous coal reserves to generate about one third of its fuel requirements. Subsequently, Sasol became involved in the chemical industry which now accounts for about

4Sight

The world has, in the last twenty years, entered what has been characterised as the 4th Industrial Revolution (4IR). It has been described as “... the biggest structural change of the past 250 years — a transformation of scale, scope and complexity unlike anything humankind has experienced before.” In simpler terms, 4IR refers to the digital convergence of